The week ahead: expect transitory weakness in September’s nonfarm payroll growth - Nomura


Analysts at Nomura offered a preview of the key events for the week ahead.

United States | Data preview

Although the labor market remains healthy, we expect transitory weakness in September’s nonfarm payroll growth due to Hurricanes Harvey and Irma.

Construction spending (Monday): Construction spending in July unexpectedly fell by 0.6% m-o-m with broad-based weakness except for single-family home construction. The slowdown in construction activity for rental housing and commercial properties will likely continue to drag on the economy. Weakness in private nonresidential construction outlays could continue to weigh on investment in nonresidential structures for our Q3 GDP tracking estimate. However, we expect some increase in construction activity following the widespread damage to structures in Texas and Florida following Hurricanes Harvey and Irma, respectively. That said, the pace of rebuilding at this point is likely to be gradually spread out over coming months in Q4.

ISM manufacturing index (Monday): For September, we expect the ISM manufacturing index to moderate somewhat to 58.0, a still-elevated level that would be consistent with optimism reported in regional surveys. Both the Philly Fed and Empire State manufacturing surveys showed strength in relevant components for ISM manufacturing in September, pointing to continued strength in the manufacturing sector. Further, continued growth in the global manufacturing activity would remain favorable for domestic sentiment. However, considering supply disruptions from Hurricanes Harvey and Irma, it appears unlikely that the elevated reading of 58.8 in August, the highest since April 2011, will be sustained. 

Vehicle sales (Tuesday): Vehicle sales slowed notably in August to 16.0mn saar, partly reflecting the effect of Hurricane Harvey in the Gulf Coast region. For September, we expect some rebound in sales as households replace vehicles damaged by Hurricanes Harvey and Irma. Vehicle sales in 2017 have slowed, driven by decreased fleet sales by major automakers. Healthy job gains and personal income growth should support retail demand. However, decreases in auto production in the face of weaker-than-expected sales pose a downside risk to GDP growth this year. Data distortions from the hurricanes increase uncertainty over the near-term sales outlook, but we expect a modest rebound to 16.3mn saar in September.

ADP employment report (Wednesday): Reflecting our forecast for private payrolls in the BLS employment report on Friday, we expect ADP to report an increase of 45k in private payrolls for September

ISM non-manufacturing (Wednesday): We forecast a slight increase to 56.2 for the ISM non-manufacturing index for September. Regional business surveys have shown sustained optimism so far during the month. However, there are some downside risks to our forecast. Weaker-than-expected retail sales in August could dampen nonmanufacturer sentiment somewhat in September. Moreover, the supply chain and other business disruptions from Hurricanes Harvey and Irma could have some negative effect on sentiment during the month. That said, the six-month average of the ISM nonmanufacturing survey has consistently been above 56.0 for the past seven months, highlighting solid domestic demand in recent months. We expect non-manufacturing businesses to maintain a favorable business outlook in the near term.

Initial jobless claims (Thursday): Initial jobless claims increased 12k to 272k for the week ending 23 September, largely reflecting an increase in Florida after Hurricane Irma. Overall, while the effect from the recent hurricanes has increased aggregate initial jobless claims, we believe the underlying pace of the labor market remains strong. Based on previous hurricanes, initial jobless claims could revert to their earlier average within a month.

Trade balance (Thursday): In the advance report by the Census Bureau, the goods trade deficit narrowed in August, with a moderate decrease in goods imports and a small increase in exports. There is some risk of future revisions based on temporary port closings after Hurricane Harvey disrupted major ports in the Gulf Coast region. However, based on the advance estimates, we expect the trade deficit to narrow to $41.4bn in August, from $43.7bn in July.

Factory orders (Thursday): The advance durable goods report for August indicated healthy momentum in the industrial sector in Q3. August core durable goods orders increased 0.2% m-o-m, and shipments of core capital goods (non-defense capital goods excluding aircraft), an indicator of current equipment investment, increased by a solid 0.7%. We expect no major revisions for the durable goods component in the factory orders report for August.

Employment report (Friday): We forecast a 50k increase in nonfarm payrolls, largely reflecting our assessment of the impact from inclement weather. For private payroll employment, we expect a 45k increase. A much larger than usual amount of uncertainty surrounds the September employment report from the BLS due to Hurricanes Harvey and Irma. Harvey brought substantial disruptions in the Greater Houston area in late August. In addition, Hurricane Irma brought widespread power outages in Florida throughout the survey week for the BLS’ monthly establishment survey (the week containing 12 September). Any temporary shutdown of businesses due to prolonged power outages during the survey period may have prevented many employees from working during this period. Moreover, the survey methodology treats establishments that failed to respond to the survey in time of disasters as having no employees that worked during the survey periods. For this reason, we think that there is a significant downside risk to our forecast.

Although our nonfarm payroll forecast is well-below recent trend, we still believe the underlying pace of the labor market remains strong. Supporting this view, regional labor market indicators, including the Philly Fed and Empire State manufacturing surveys, remained elevated in September, supporting our forecast of a 15k increase in manufacturing employment. Initial jobless claims spiked in Texas and Florida, but were subdued in unaffected states. Finally, the labor market differential indicator from the Conference Board, while moderating in September, points to a favorable job market. A potential below-trend employment reading in September will likely be transitory.

The weather effects on the household survey will likely be much more muted, but there is still some uncertainty around the household report. However, the BLS household survey counts respondents who report being away from work due to inclement weather as employed. Therefore, we expect the unemployment rate to remain unchanged at 4.4% (4.370%).

Finally, disruptions caused by hurricanes pose a downside risk in aggregate weekly hours as hours worked tend to be very sensitive to storms. This suggests that average hourly earnings (AHE) could be boosted by a below-trend reading in hours worked. 

Moreover, we expect a calendar quirk in September involving pay period length adjustments in the BLS establishment survey to add some noneconomic boost. Altogether, we expect AHE to increase by 0.4% (0.354%) m-o-m (2.61% y-o-y).

Wholesale inventories (Friday): An advance estimate by the Census Bureau showed a strong 1.0% m-o-m increase in August wholesalers’ inventories. The Census Bureau reported that there appears to be no significant impact from hurricanes on their data collection. However, hurricanes might have weighed more on sales as opposed to production, which resulted in strong inventory accumulation in August. By contrast, in past episodes of major hurricanes, supply disruptions often led to inventory reduction.

Consumer credit (Friday): Consumer credit increased by $18.5bn in July, the largest one-month increase since February. With steady job gains in the labor market and continued growth in personal income, we expect consumer credit to continue expanding steadily over the medium term.

Euro area | Data preview

ECB minutes and UK PMI data are in focus this week. 

UK PMI manufacturing (Mon): A surge in the output and new orders indices in August took the headline manufacturing index up to nearly 57 – the 16th highest monthly observation out of the 128 readings since the start of 2007. We expect some payback from August’s jump in the September survey and forecast an easing to a still very respectable 56.

UK PMI services & composite (Wed): Unlike the manufacturing survey, the headline services index fell to 53.2, its lowest level since last September. The widening gap between manufacturing and services growth (manufacturing outperforming by more than at any point since 2011) likely reflects improving exports being supported by both a lower sterling and strengthening UK-weighted global growth (note the recent rises in euro area PMIs, for example). Our forecast of a rise in the services index would offset the fall in manufacturing to raise the composite index from 54.0 to 54.5 – slightly above its long-run average of 54.2.

ECB account of the monetary policy (Thu): We doubt that the minutes from the ECB’s September meeting will reveal much that we don’t already know. ECB President Draghi has already communicated that the bulk of the decisions about a tapering campaign will be made at the October meeting, so there will be no hints about what might happen then. However, there will likely be some discussion about the impact of a stronger euro on the economy and on inflation, although again probably little that we don’t already know. 

German factory orders (Fri): We expect German factory orders to increase 1.4% m-o-m in August following a 0.7% m-o-m decrease in July. We expect German manufacturing activity to remain strong in the period ahead notwithstanding the euro’s recent appreciation.

Japan | Data preview

We forecast healthy upward revisions to fixed investment forecasts, especially construction investment.

September BOJ Tankan (Monday): We expect that the current business conditions DI for large manufacturers to come in at 18, up 1 point from the June survey. Exports have remained on an upward trajectory thanks to solid global economic conditions, and industrial production is projected to stage a modest quarter-on-quarter increase in JulySeptember. Manufacturing sentiment is already strong, but we think it is likely to improve slightly further. By contrast, we expect the current business conditions DI for large nonmanufacturers to come in flat versus the previous survey at 23. We think that poor summer weather may have dented consumer spending. However, the Consumer Confidence Index and the current conditions in the Economy Watchers Survey (seasonally adjusted) both came in flat versus April-June in July-August, on which basis we think it unlikely that consumer sentiment has deteriorated versus the previous survey and therefore see a deterioration in business sentiment is as unlikely.

Also, we expect a future conditions DI for large manufacturers of 16, 2 points below the current conditions DI, and a large non-manufacturers future conditions DI at 21, also down 2 points, based on the Reuters and QUICK Tankan surveys. Given future conditions DIs are often lower than current conditions DIs when the latter are high, we are not actively forecasting a downturn in corporate sentiment, but we also see few grounds for future conditions DIs to improve, based on the North Korean crisis and political instability in the United States. 

We estimate that the September Tankan survey will show an FY17 fixed investment growth forecast (excluding software investment, including land purchasing expenses) of 4.8% y-o-y on an all industries, all enterprises basis, up 1.9pp from the 2.9% reading in the June survey. The July-September 2017 Business Outlook Survey showed clear upward revisions to capex plans, and we think that the BOJ Tankan survey will also reveal solid enthusiasm for capex. 

We attribute this solid enthusiasm for capex to the possibility of growing demand for construction investment, including land purchases. The June BOJ Tankan survey contained boosts to capex forecasts from the transport & postal activities and accommodations, eating & drinking services sectors, reflecting the construction of logistics facilities to deal with growth in mail order shopping and strong demand for office buildings and hotels in the center of Tokyo. We think the September survey will reveal consistently strong contributions from these sectors and also envision upward revisions to capex forecasts within the real estate sector.

Asia | Data preview

We expect China’s official PMI to moderate and FX reserves to decline, and rates to be left on hold in Australia and India. In several countries we expect CPI inflation to rise.

China: We expect the official PMI in September to moderate as growth momentum loses steam. Our FX strategists believe China’s headline FX reserves will fall by USD15.3bn to USD3076.2bn in September. After adjusting for FX and coupon effects, we estimate a fall of USD10.0bn, from an increase of USD1.8bn in August.

Australia: We expect another balanced statement from the Reserve Bank of Australia (RBA), with no clear policy guidance. Comments on growth, inflation, wages and AUD should be little changed, in our view. The RBA may note the recent sharp decline in commodity prices, particularly iron ore, but against this could sound even more confident about employment prospects after another strong recent labour force report.

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