Week ahead for U.S. gets busy; watching nonfarm payrolls - Nomura

Analysts at Nomura offered an outlook for a busy week ahead in the US calendar.

Key Quotes:

"We expect data for September to show that economic activity expanded at a better pace following a broad-based slowdown in August.

Construction spending (Monday): Construction spending failed to grow in July, with a 3.1% drop in public construction spending and private construction activity growing by only 1.0%. In the private sector, nonresidential construction spending has been growing at a solid pace over the past three months, while residential construction spending has been lagging after a strong start to the year. In the public sector, construction activity has been volatile, as both residential and nonresidential construction activity has been growing in fits and starts. We think that private nonresidential construction activity may slow in coming months, as there are signs that credit conditions are tightening in the commercial real estate market. However, some of the weakness could be offset by better construction activity in the housing sector. Consensus is looking for a 0.3% m-o-m increase in August. 

ISM manufacturing (Monday): The August report showed a clear slowdown in manufacturing activity. The headline index declined over 3 points in August, to 49.4 from 52.6, falling below 50 for the first time since February 2016. The production and new orders indexes dropped sharply below 50, to 49.6 and 49.1 from 55.4 and 56.9, respectively, implying production and new orders activity contracted on balance in August. Plus, other data from the industrial sector, such as industrial production and durable goods orders, sent similar negative signals in August. The early read on the manufacturing sector for September has been also weak. The ISM-adjusted Philly Fed and Empire State manufacturing indices trended lower and commodity prices for raw industrial goods declined for a second month. Taking these factors into account, we expect the ISM manufacturing index to decline to 49.0 in September. Vehicle sales (Monday): Total vehicle sales failed to meet expectations in August at 16.9mn SAAR. However, early readings from the industry suggest automakers had a better month in September, in part due to strong performance over Labor Day weekend. Therefore, we think that the slowdown should be transitory and forecast that total vehicle sales at 17.7mn SAAR and domestic vehicle sales at 13.7mn SAAR in September.

ADP employment (Wednesday): In line with our forecast for BLS private payrolls, we expect ADP private employment to have gained an additional 155k jobs in September. 

Trade balance (Wednesday): The advance goods trade balance was -$58.4bn in August, a modest narrowing from -$58.8bn in July. The preliminary estimate suggests exports grew by 0.7% m-o-m while imports only increased by 0.4%. Exports have been growing at a steady rate, which is a promising sign that the negative impact of the stronger dollar on US goods is finally starting to wane and global demand is starting to improve. Given the goods trade balance was little changed from July and our assumption that service imports and exports both declined slightly in August, we forecast a narrowing of the total trade balance to -$39.0bn in August from -$39.5bn. 

Factory orders (Wednesday): The advance estimate on durable goods manufacturing activity was broadly weak in August. New orders were unchanged and shipments declined by 0.4% m-o-m, which likely led to an unintended increase in inventories. Core capital goods shipments, a good measure of the underlying trend in business investment spending, declined by 0.4% following a downwardly revised decline of 0.7% in July. The upcoming factory orders report will include data on the nondurable goods component, in addition to the final estimates for durable goods orders, shipments, and inventories. Consensus expects factory orders, the sum of durable and nondurable goods orders, to decline by 0.5% in August. 

ISM non-manufacturing (Wednesday): This index declined over 4 points to 51.4 from 55.5, falling well below expectations. The details were not much better, as the business activity index dropped sharply to 51.8 from 59.3 and the new orders index declined by close to 9 points, to 51.4 from 60.3. Consumer activity and retail employment growth was soft in August, but there are reasons to believe that the pullback in demand in August should be temporary. Consumer sentiment, on balance, improved in the latest readings, and we expect vehicle sales and employment reports next week to show that the economic performance improved in September. Therefore, we forecast an increase in the ISM nonmanufacturing index in September to 52.0 from 51.4. Initial jobless claims (Thursday): Initial jobless claims have been at or below the 260k threshold throughout September. This is a good sign that layoffs are low and labor market conditions remain healthy. 

Employment report (Friday): The pace of employment growth slowed in August, only adding 151k workers to payrolls in August following gains of 271k and 275k in the prior two months. Data on the labor markets remain, on balance, sanguine. Initial and continuing claims remain at historically low levels, and consumers have reported more positive views on the job market. But not all data on the labor market have been pointing up. The latest national employment indicators from the ISM manufacturing and nonmanufacturing reports suggest employment activity has been sluggish. Plus, regional employment indicators from the Philly Fed and Empire State surveys for September were well entrenched in negative territory. Our private payrolls tracking model indicates businesses gained 214k workers in September, which would suggest a reacceleration in job growth. But we think that our model may be giving a too optimistic read on job growth as it relies heavily on the claims data which do not necessarily imply more job creation, just fewer involuntary separations. Taking all these factors into account, we think nonfarm payrolls grew by 160k with 155k of those workers being added to the private sector. Given the weak employment data from regional manufacturing surveys, we think manufacturing payrolls declined by 5k. We also think the steady job gains should be enough to absorb any incoming labor supply but not enough to exert meaningful pressure on the unemployment rate. Therefore, we forecast an unchanged unemployment rate at 4.9% in September. Elsewhere, we forecast average hourly earnings grew by 0.2% m-o-m (we have revised down from our initial forecast of 0.3% m-o-m)."