5 THINGS: Downside Risk To US Jobs, Earnings

By Holly Stokes

     WASHINGTON (MNI) - Analysts expect the May U.S. employment report to bounce

back after relatively soft numbers in March and April, with a median estimate

for a gain of 194,000 for headline payrolls and a 200,000 gain for private

payrolls in May. Analysts also expect average hourly earnings to rise 0.2%,

while the average workweek remains at 34.5 and unemployment stays at 3.9%.

     Ahead of the release on Friday, we outline five themes for particular

attention.

--MARKETS EXPECT LOWER AHE

     Market participants expect average hourly earnings to come in a little

weaker than analysts, with the whisper number tracking at a 0.1% rise. Both

markets and analysts have a slight tendency to overestimate hourly earnings,

suggesting a downside risk to the two estimates. Interestingly, this history of

overestimating is more pronounced for analysts, giving more credibility to the

lower whisper number. 

--MARKETS AND ANALYSTS RECENT NFP OVERESTIMATES

     Markets are also slightly less optimistic for the nonfarm payrolls print,

expecting a 185,000 gain in May as opposed to analysts' prediction for 194,000.

Markets and analysts have shown a tendency to overestimate payrolls in the past

year, both posting seven overestimates compared to five underestimates. Further,

both markets and analysts tend to miss by a larger degree when overestimating,

suggesting a strong downside risk.

--HISTORY OF DOWNSIDE RISK TO MAY PAYROLLS

     Adding to the likelihood that analysts may be overshooting nonfarm payrolls

by a large degree, analysts have overestimated May nonfarm payrolls 11 of the

last 20 years. Similar to this past year's misses, analysts tend to miss by a

larger degree when overestimating, with an average overestimate of 96k as

opposed to the average underestimate of 48k. While some of these larger misses

occurred more than a decade ago, the tendency to overestimate has continued in

recent years, with the last two years being overestimated.

--WEATHER FUELS HOPE FOR REBOUND IN NFP

     Analysts expect nonfarm payrolls to rise by 194,000 - which would be the

largest gain since February, when an unseasonably cold January and a flu

epidemic supported major payback and spurred the large gain. Again, analysts

look for payback, albeit more muted than February's rise, arguing that four

nor'easters in March and the coldest April in 21 years likely muted employment.

If a 194,000 print comes to fruition, this would put the print just 4,000 above

the past year's average gain, assuming no revisions. Despite historicals

pointing to a miss, if analysts are correct and there is payback, then market

participants may take this upside surprise on the last payrolls report before

the June FOMC meeting as support for further rate hikes. 

--WATCHING FOR FUTURE FALLS IN U-RATE

     Last month the unemployment rate slipped to a new 17-year-low, hitting

3.9%. Most analysts expect the unemployment rate to hold this low level in May,

even as discouraged workers rejoin the labor market. Further, many analysts see

it climbing down to 3.8% in the next few months, supporting the Fed's March SEP

that unemployment will hit 3.8% in 2018. Projections for a continued decline in

the unemployment rate stand in stark contrast to analysts' projections for

average hourly earnings to climb just 0.2% month/month - keeping the year/year

at 2.6% for the fourth month in a row.

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

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