MNI 5 THINGS: US Jobless Rate Could Fall; AHE May Outperform

5 Things To Look For In US Nonfarm Payrolls Report

By Sara Haire and Holly Stokes

     WASHINGTON (MNI) - Gearing up for Friday's U.S. employment report, analysts

expect March to deliver a strong report, seeing a gain of 195,000 for headline

payrolls, a further decline in the unemployment rate to 4.0%, a jump in average

hourly earnings (AHE) of 0.3%, and a rise in average weekly hours to 34.5. 

     Ahead of the release, we outline five themes for particular attention.

--UNEMPLOYMENT RATE TO FALL

     After five months of 4.1% prints for the unemployment rate, analysts expect

it to break the recent trend and fall to 4.0%. However, much of this hinges on

expectations for the labor force participation rate to decelerate after

February's surprise 0.3pp jump to 63.0%, its largest increase since April 2010.

In the past 20 years there have only been three increases in the civilian labor

force this large, each followed by a decline in the next month -- suggesting

analysts may be correct to expect a pullback. However, in an exclusive interview

with MNI's Jean Yung, a Federal Reserve Bank of Atlanta economist sees

February's jump in the labor force as potentially more systemic -- signalling a

delayed response to strength in the labor market as entrants continue to be

encouraged to seek work.

--MARKETS BET LOW ON AHE

     Analysts expect a significantly stronger 0.3% month/month gain in average

hourly earnings than the whisper number, which expects another modest 0.1% gain.

In the past eight months, analysts have shown a slight tendency to overestimate

-- with four overestimates vs two underestimates. Markets have overestimated

three times and underestimated two times. While analysts have a slightly less

accurate track record than markets, they typically miss by a smaller margin,

with an average overestimate of 0.13 and and average underestimate of 0.15

versus market's 0.20 and 0.25, respectively. 

--WEATHER GIVES UPSIDE RISK TO AHE

     Both favorable calendar effects and abnormal weather suggest a stronger

print for average hourly earnings. The March survey week included a "pay day," a

factor that often leads to elevated hourly earning prints. Additionally, with a

Nor'easter hitting during the survey week, earnings should again show a skewed

labor force. Just as January's severe weather forced many lower paid employees

to work reduced shifts and lifted hourly earnings up 0.3%, March may experience

similar temporary gains. While both of these factors do not suggest underlying

wage strength, markets have recently been very sensitive to shifting wage growth

and reacted to weather-related noise. If hourly earnings surprise markets to the

upside, Treasuries may sell off as more rate hikes get priced in and Treasury

curve bear steepening. However, the degree of reaction will be largely

determined by how Nonfarm Payrolls turn out.

--DOWNSIDE RISK FOR PAYROLLS

     The February payroll gain surprised analysts and markets, pushing analysts

to vary their expectations on how strong March payrolls will be. The low

estimate by analysts is a muted 130k gain, while the high estimate sees a strong

250k rise, with the median forecast coming in at 195k. In the last 20 years, the

March payrolls has come in softer than the median analyst's expectation 12

times. The average overestimate in the last 20 years is 91k, while the average

underestimate is only 51k. In addition, a more recent trend shows that in the

last 10 years, analysts have overestimated March payrolls eight times, with an

average overestimate of 59k. Since there has been recent strength in the job

market it is unsurprising that analysts are forecasting another strong gain, but

given the March history of overestimating, analysts could see a downside miss to

their forecasts. 

--POTENTIAL GREATER LOSS FOR MARKETS

     Despite markets expecting average hourly earnings to post a softer gain

than what analysts are expecting, the whisper number for the headline payrolls

gain is stronger at 210k, above the median forecast among analysts of 195k.  In

the past year, analysts and markets have both missed to the same side, however,

markets tend to miss by a larger amount with the absolute average of their

misses at 53k while analysts' is 48k. Since markets are anticipating a higher

payrolls gain than analysts, and analysts have the tendency to overestimate

March payrolls, there is an even greater downside risk. Despite the the

underestimates for the past two months, analysts and markets have under and

overestimated six times each, indicating no clear trend.

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

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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