US Nonfarm Payrolls October Preview: Can positive data outweigh election turmoil?

• Payrolls forecast to expand 600,000 in October from 661,000.
• Unemployment rate expected to drop to 7.7% from 7.9%.
• Markets could respond to better data despite election turmoil.

Amid the election turmoil the most important US economic statistic, Nonfarm Payrolls, may offer a little distraction from the contest to be the next President.

The pandemic lockdown of March and April and the collapse of growth in the second quarter was followed by and even stronger expansion but that success has faded somewhat in October.

As Federal Reserve Chairman Jerome Powell noted on Thursday after the FOMC meeting, “Economic activity has continued to recover from the depressed second quarter level. In recent months the pace of improvement has moderated.”

Employment Situation Report

Nonfarm payrolls are forecast to add 600,000 workers in October after increasing 661,000 in September. It would be the smallest gain since the 22.16 million job losses of March and April began to reverse in May. If correct it would bring the rehires to 12.001 million and the percentage to 54.16%.

Nonfarm Payrolls

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The Unemployment Rate (U-3) is predicted to drop to 7.7% from 7.9% in September . The Underemployment Rate (U-6) was 12.8% in September.

Average Hourly Earnings (YoY) is projected to slip to 4.6% from 4.7% and Average Weekly Hours are estimated to be unchanged at 34.7.The Labor Force Participation Rate was 61.4% in September.

Labor market indicators

Initial Jobless Claims fell to 751,000 in the October 30th week and Continuing Claims were 7.285 million, both the lowest since the start of the pandemic. The improvement in claims has been steady but the number of weekly layoffs has continued for over seven months at levels never seen before, except briefly in the financial crisis of 2008-2009.

The employment indexes from the Institute for Supply Management (ISM) Purchasing Managers' Survey maintained their expansive outlook in October.

The services index was 50.1 in October down from 51.8 in September but better than the 49.8 forecast for the first two positive months since February.

The manufacturing index scored 53.2, ahead of the 49.6 result in September and vastly stronger than the 40.9 forecast. It was the first positive month in 15. The pandemic low was 27.5 in April.

ISM Manufacturing Employment Index

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It may be that the excellent level of new orders in both sectors has finally induced managers to expand their payrolls.

US economy

Gross Domestic Product soared at a record 33.1% (annualized) rate in the third quarter following the equally historic 31.4% decline in April, May and June. Growth was powered by strong consumer and business spending.

Retail Sales rose 1.9% in September on a 0.7% forecast and has improved an average of 1.01% per month from March through September.

The Durable Goods business investment proxy, Nondefense Capital Goods Orders ex Aircraft, doubled its September estimate at 1% and has gained 0.5% per month in the same period.

Business sentiment on the whole in October was more positive than anticipated.

The ISM Purchasing Managers' Index for the manufacturing sector rose to 59.3 well ahead of its 55.8 forecast and the prior month's 55.4. It was the best reading on factory sentiment since September 2018.

The index of New Orders jumped to 67.9, a new record, just two months after setting the previous high at 67.6. Analysts in the Reuters Survey had predicted a drop to 45.9 in October from 60.2.

Sentiment in the much larger service sector fell slightly to 56.6 last month from 57.8, as did the New Orders Index to 58.8 from 61.5 but it was far stronger than the 49.4 forecast.

Conclusion and markets

The slowdown in hiring and the continued high level of layoffs represented by initial jobless are the chief problems for the economic recovery. Businesses continue to fail as consumer traffic in many sectors, hospitality, travel and dining primarily, remain far below normal levels.

Consumer spending has sustained remarkably well, but until there is another stimulus package, its retreat is expected.

With the holiday season looming that traditionally makes or breaks the year for many retailers, the urgency of a second bill cannot be lost on Congress, even if for the moment, the election has everyone's complete attention.

The rising COVID-19 diagnoses in many parts of the country is another concern. The daily new count passed 100,000 of the first time this week and even though hospitalizations and fatalities are increasing much more slowly and are still well below the levels of the spring, the potential for ever greater numbers of business closures is a drag on outlook and employment.

Even given the election distractions and the gathering economic worries, markets will likely respond to a positive payroll report. A weaker report will probably be ignored as not unexpected.