After March’s dismally disappointing 102k payrolls print, expectations are for a swift rebound in hiring in the April jobs report to 192k – that will confirm that the March results were a fluke, and not a signal of an emerging economic soft patch… despite the collapse of economic data this month and a majority of labor market indicators deteriorating…
However, Goldman Sachs warns investors not to expect too much – Most labor market indicators decelerated somewhat, and we don’t expect a meaningful weather rebound (relative to trend).
Reasons to expect a softer report include the following:
1. Softer services business surveys. Service-sector employment surveys were softer on net in April. Our non-manufacturing employment tracker declined 1.7pt to 55.2. This deterioration was also broad-based, with decreases in five of the six business survey measures we track in the sector. In particular, the ISM non-manufacturing employment component declined 3.0pt to 53.6. Additionally, the Conference Board labor market differential – the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get – edged 0.9pt lower to +22.9, but still remains at a high level. Service-sector employment growth slowed to 87k in March, well below the 151k average over the last six months.
2. Softer manufacturing business surveys. The manufacturing employment surveys were also weaker on net in April. Our manufacturing employment tracker edged down 1.1pt to 58.4, still a relatively elevated level consistent with a solid pace of factory job gains. Manufacturing employment rose 22k in April, roughly in line with the 27k average over the past six months.
3. Tighter labor supply constraints. We see the labor market as at or a bit beyond full employment and diminished slack should exert some downward pressure on job growth. Labor supply constraints are likely to weigh the most on hiring in the hiring season months of April and May.
4. A drop in help-wanted ads. The Conference Board’s Help Wanted Online (HWOL) report showed decreases in both new (-1.0%) and total (-1.4%) online ads in April. We currently put only limited weight on this indicator in light of recent research by Fed economists showing that the HWOL ad count has been influenced by price increases for online job ads.
Neutral factors include:
1. No meaningful weather rebound. Weather very likely reduced March payroll growth as payrolls in weather-sensitive sectors (construction, retail trade, leisure and hospitality) fell 14k and job growth slowed significantly in the affected Northeast and Southeast regions. However, Exhibit 1 shows that the March regional weakness likely represents payback following above-trend growth in January and February. We therefore don’t expect a significant April bounce-back in job growth in the affected areas.
March Weakness in East Was Likely Payback from Earlier Weather Strength
2. Jobless Claims. Initial claims rebounded 6k between the survey weeks to 233k in the April survey week. In contrast, continuing claims have kept declining in April.
3. ADP. Private sector payrolls in the ADP report rose by 204k in April, slightly above consensus expectations. We don’t make much of this small beat because ADP’s predictive content for the BLS numbers has been very limited recently.
Goldman offers no factors that suggest a stronger report.
We expect the unemployment rate to decline to 4.0% in April after stabilizing at 4.1% for six consecutive months. The unrounded unemployment rate edged lower to 4.07% in March. The bar for the unemployment rate to decline on a rounded basis is therefore low, with trend job growth still likely roughly double the breakeven pace.
We estimate average hourly earnings for all private workers rose 0.2% in April, lowering the year-over-year rate to 2.6%. While last week’s cycle-high growth pace in the Q1 Employment Cost Index and the pick-up in our wage tracker suggest that underlying wage pressures are rising, our below-consensus forecast for the year-over-year rate reflects somewhat unfavorable calendar effects (as the pay period ends on the 14th) and a potential mean reversion following the firm March print.
Bloomberg notes that consensus has tended to undershoot the April payroll gain by five- and 10-year averages of 15k and 30k, respectively, in recent years. Similarly, April-hiring gains have shown a tendency to exceed the six-month trailing average by about 15k-40k. Both of these factors suggest an increase exceeding 200k. The ADP private employment survey results (204k) also point to a stronger outcome, as this series has shown a bias to underestimate by about 40k. The seasonal adjustment factor applied to April payrolls is typically somewhat larger than February and March; it has averaged near 865k over the past five years.
Nonfarm Payrolls: Exp. 198k, Prev. 103k
Unemployment Rate: Exp. 4.0%, Prev. 4.1%
Average Hourly Earnings Y/Y: Exp. 2.7%, Prev. 2.7%
Average Hourly Earnings M/M: Exp. 0.2%, Prev. 0.3%
Average Work Week Hours: Exp. 34.5hrs, Prev. 34.5hrs
U6 Unemployment Rate: Prev. 8.0%
Labor Force Participation: Prev. 62.9%
Unemployment rate expected to drop to lowest
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Finally, as Bloomberg notes, a substantial disappointment in payrolls would magnify concerns that trade-war anxieties are yielding tangible economic fallout.
Otherwise, the market focus will more likely be on the unemployment rate and pace of wage increases. The former is overdue to reach a new low, while consensus expects the latter to trend sideways.
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