Nonfarm payrolls expected to increase 180k? - Nomura

Analysts at Nomura explained that they expect nonfarm payroll employment to increase 180k in November, with 175k from the private sector and 5k from the government. 

Key Quotes:

"Reflecting the recent strength in industrial growth, we expect manufacturing employment to increase 20k."

"For wages, we forecast a 0.3% m-o-m increase in average hourly earnings, partially driven by a rebound from a soft, weather-related print in October."

"Consistent with another month of employment growth above the pace needed to absorb new labor market entrants, we expect the unemployment rate to decline 0.1pp to 4.0% (4.02%)." 

"Business and manufacturing sentiment surveys remained elevated in the month, with both the ISM manufacturing and nonmanufacturing employment indices well within growth territory. Moreover, while initial claims ticked up during the month, some of the increase can be attributed to delayed applications from Puerto Rico slowly filtering in after the widespread destruction from Hurricane Maria. Thus, this uptick is unlikely to be reflected in November’s nonfarm payroll numbers as Puerto Rico is technically out of scope for the BLS establishment survey. The Conference Board’s labor market differential (the difference between those reporting jobs “plentiful” versus “hard to get”) increased 0.6pp to 20.2 in November, the highest reading since July 2001. Finally, the ADP employment report for November showed a 190k increase in private employment, consistent with our expectation for another healthy month of employment growth."

We forecast a 20k increase in manufacturing employment. The industrial sector has recently contributed an outsized share of the economic momentum upswing. Over the past two quarters, growth in the industrial-related sector (exports, equipment, structures and inventory investment) contributed an average of 1.3pp to topline real GDP growth, well-above the -0.2pp average for the previous nine quarters. Moreover, regional manufacturing surveys, as well as the ISM manufacturing index, have all experienced material improvements in the employment outlook.

This surge in manufacturer employment sentiment during 2017 corresponds with a pickup in manufacturing employment growth, even as service-providing industries continue to gradually decelerate.

Average hourly earnings After the first m-o-m decline since 2014, partly driven by weather-related disruptions, we expect a solid 0.3% (0.26%) increase for average hourly earnings (AHE) in November. On a 12-month basis, this would bring AHE up 0.3pp to 2.7% y-o-y, partially reversing the 0.4pp decline in October. Moreover, upward revisions to the previous month are possible. October’s AHE was likely driven down by an influx of lower-paid workers who were off of payrolls the previous month due to hurricane disruptions. Wage growth remains subdued relative to previous recoveries. While some structural forces, such as decreased business dynamism, changes in the labor force composition between high-income and low-income earners, and lower labor market turnover, are likely adding headwinds to compensation growth, strong incoming data should be supportive of a gradual increase in AHE over the medium term.

Household survey Considering the current pace of employment growth, uncertainty surrounding the unemployment rate seems more focused not on whether it will decline but rather by how much. Indeed, since the FOMC meeting in September (the last SEP), the unemployment rate has declined 0.37pp to 4.1%, 0.2pp lower than the most recent FOMC median forecast of 4.3% for end 2017. This increases the likelihood that FOMC participants will lower their end-of-year forecast for the unemployment rate further. Consistent with our expectation for another month of strong employment growth, we expect the unemployment rate to decline further in November by 0.1pp to 4.0% (4.02%). 

As mentioned above, while initial claims ticked up slightly in November, most of the increase was due to a transitory increase from Puerto Rico, outside of the scope of the BLS survey. If our forecast proves correct, the reading of 4.0% would be the lowest since December 2000. Note that October’s unrounded unemployment rate (4.07%) sat just on the brink of a rounded 4.1%. Thus, there is not far to go to 4.0%. In October, the flow of workers from employed to out of the labor force increased sharply by 771k, the largest one-month increase in the history of the series, contributing to a 0.4pp decline in the labor force participation rate. November may see some reversal, indicating potential for an uptick in LFPR, suggesting some upside risk to our forecast for the unemployment rate."