October Payrolls Preview: Expect Another Slowdown But Not Enough; Market Scenario Analysis

It’s only appropriate that one day after we saw a veritable cornucopia of mass layoff announcements…

Layoffs announced in the last day:

– Lyft 13% of workers
– Opendoor 18%
– Stripe 14%
– Chime 12%
– Twitter 50%
– Morgan Stanley (% unknown)

— Genevieve Roch-Decter, CFA (@GRDecter) November 3, 2022

… and on the same day that Elon Musk will fire half of Twitter employees, that the Bureau of Lies (sic) and Statistics will come up with the most grotesque “seasonal adjustment” yet, and claim that some 200K jobs were created in the US, or at least that’s what the median Wall Street consensus is; the actual reported number will likely be just fractionally below this estimate to make it seem “credible.” Alas, a representation of the actual US economic reality won’t be available until the first Friday of December, with the midterm elections now in the rearview mirror, when the BLS will have no choice but to aggressively start catching down to what the jobs number is, including aggressive prior revisions (which by then nobody will care about), in a month that will be seen as a watershed “kitchen sinking” of data, and which will furiously reprice the Fed’s hiking intentions and terminal rate.

But before we get there, we have tomorrow’s payrolls fairy tale to get through: in his preview of what’s in store, Goldman trader John Flood writes “TYVM to Jay Pow for somewhat derisking the jobs print tomorrow. Street is looking for +200k headline print (GIR +225k, last +263k), AHE MoM .3% (GIR .35%, last .35%), U/ E Rate 3.6% (GIR 3.5%, last 3.5%) and Labor Force Participation rate of 62.3% (GIR 62.3%, last 62.3%). We are still FIRMLY in a bad data is good for stocks and vice versa setup here (and will be for the foreseeable future).”

The Goldman trader also adds that “weaker employment data should lift the S&P more than stronger data will hit it (I would not have said this before yesterday’s developments)”, and provides the following NFP matrix:

• Goldilocks: headline, AHE <.3 u rate>3.6 and Labor Force Participation rate >62.3%. S&P quickly claws back 2+%
• Worst Case: >300k headline, AHE >.3%, U/E
• Base Case: 175k – 225k headline, AHE .3%, U/E 3.6% and LFP 62.3%. S&P rallies 50 – 100bps.

A more detailed look of what to expect courtesy of Newsquawk:

• The rate of payrolls growth is expected to moderate in October, while the jobless rate is expected to rise a little.
• Goldman estimates non-farm payrolls rose by 225k in October (mom sa), above consensus of +195k but a slowdown from the +263k pace in September.
• There will be attention on the wages measures; any downside could give the Fed cover to downshift the pace of rate hikes in December.
• A weak headline could also see calls for the Fed to slow its normalization become louder, as the central bank aggressively tightens policy into restrictive territory to cap inflation, particularly as politicians have an eye on the US midterm elections next week.
• According to Goldman, labor demand remains elevated despite declining this year, and Big Data indicators generally point to above-consensus payroll gains. The bank also believes the exit of the youth summer workforce weighed on job growth in the September report, and the absence of that headwind argues for a pickup in some low-skill services categories. Generally, job growth tends to pick back up in October when the labor market is tight, as firms frontload autumn and pre-holiday hiring.

Estimates:

Consensus expects 200k nonfarm payrolls to be added to the US Economy in October, moderating from the 263k rise seen in September. If the consensus expectation is realized, it would be beneath the three-, six- and 12-month averages (at 372k, 360k, 474k respectively).

The unemployment rate is seen nudging up by one-tenth of a percentage point, taking it to 3.6%; there will be focus on the participation rate to see whether the rise is a function of returning workers (participation previously fell one-tenth to 32.3%, which helped bring the jobless rate down by two-tenths to 3.5%). The Fed’s September economic projections forecast the unemployment rate would rise to 3.8% by the end of this year, before picking up to 4.4% next year, though the updated projections still see the longer-run unemployment rate at 4.0%.

Labor Market Proxies: Claims data for the week that coincides with the BLS’ reference period in its establishment survey saw initial jobless claims were ultimately little changed at 212,250k vs 215,750k in the reference week for the September jobs report. Similarly, continuing claims climbed a little between both of those windows, from 1.381mn to 1.388mln. In its flash purchasing managers data series for October, S&P Global said employment was broadly unchanged in the month, though the seasonally adjusted Employment Index was below the neutral 50.0 level for the first time since June 2020, driven by a fall in service sector staffing numbers, while manufacturers registered a slower pace of job creation. The ISM survey is also consistent with that view of a neutral labour market in October, with its manufacturing employment index rising from 48.7 to the neutral 50.0 level (note: the services ISM has not been released at the time this preview is being published). Meanwhile, ADP’s new gauge of national employment – which analysts continue to remain critical of given that it does not forecast the official data with any deal of success – was strong, seeing 239k payrolls added, topping expectations of 195k.

Wages: Average hourly earnings are seen rising by 0.3% M/M in October, matching the pace from the September report; the annual measure is expected to ease to 4.7% Y/Y from 5.0% – that will be encouraging Fed officials who are lifting rates to combat inflation, particularly since some analysts say that base effects will support the annual measure in October. As a point of reference, the ADP’s data for October said pay growth eased again in October, and the momentum of gains for job changers was ebbing (for these workers, annual pay growth edged down for the third straight month, to 15.2% Y/Y from 15.7% in September); for job stayers, pay gains registered 7.7% in October, in line with recent months. That would be welcome news at Fed HQ, particularly after the recent quarterly Employment Cost Index data, which suggests that pay growth was still accelerating in Q3 by some measures. Meanwhile, average workweek hours are seen unchanged at 34.5hrs.

Arguing for a stronger-than-expected report:

• Tight labor markets. When the labor market is tight, job growth tends to slow in September and pick back up in October, as shown in Exhibit 1. The September tendency in part reflects the loss of the summer youth workforce, which in September 2022 contributed -128k to job growth according to the household survey (mom sa). The absence of this headwind argues for a pickup in some low-skill services categories in tomorrow’s report. Additionally, the tight labor market incentivizes firms to frontload autumn and pre-holiday hiring, given the likely difficulty of finding workers in November and December

• Big Data. High-frequency data on the labor market were mixed in October but generally point to strong job growth, with three of the four measures available this month consistent with above-consensus payrolls (see Exhibit 2).

• Job availability. JOLTS job openings rebounded by 0.4mn to 10.7mn workers in September, swinging from below to above the level implied by alternative data (see Exhibit 3). The labor market has likely continued to rebalance at a steady pace, in Goldman’s view. The Conference Board labor differential—the difference between the percent of respondents saying jobs are plentiful and those  saying jobs are hard to get— decreased substantially relative to September but remains at a high level (-5.6pt to +32.5)

• ADP. Private sector employment in the ADP report increased by 239k in October above expectations for 195k.

Arguing for a weaker-than-expected report:

• Employer surveys. The employment components of business surveys generally decreased in October. Our services employment survey tracker decreased by 0.7pt to 51.5 and our manufacturing survey employment tracker decreased by 0.2pt to 52.7.
• Job cuts. Announced layoffs reported by Challenger, Gray & Christmas increased 7.6% month-over-month in October, following a 30.0% increase in September (SA by GS).

Neutral/mixed factors:

• Jobless claims. Initial jobless claims decreased during the October payroll month, averaging 212k per week vs. 220k in September. Residual seasonality (i.e., goalseeking) and other so-called “non-economic factors” explain much of the variation in initial claims over the last few months, and according to Goldman, “the overarching message from the jobless claims data is that layoff rates remained very low in Q3. Continuing claims in regular state programs increased 92k from survey week to survey week, although they may also be affected by residual seasonality.”

Policy Implications: Recent reports indicate that the Fed may downshift to a slower pace of rate hikes from December onwards. However, for that to happen, officials have previously indicated that they would want to see meaningful progress in bringing inflation down. Accordingly, the wages data could be influential for the December debate (the market is currently shooting for 75bps in November, and then 50bps in December). This week, the latest JOLTs data (for September) showed a rise against expectations it would decline, and while that didn’t do much to change the narrative for the November FOMC meeting, expectations of where the eventual terminal rate will be moved hawkishly (the market now sees above 5.0% in May 2023, vs just above 4.8% a week earlier). On the other side of the coin, if the headline begins to show stress (for instance, if it were to come in towards the bottom, or below the 50-300k forecast range), it could reignite concerns regarding the economic slowdown, at a time when the Fed is tightening policy aggressively, which could lead to more calls for the Fed to slow the rate it is normalising policy, particularly from the political community given the US midterm elections next week. (Note: this preview is being published before the November FOMC meeting).