MNI 5 THINGS: US Unemp Rate Could Drop Ahead Of Fed Chatter

By Sara Haire and Holly Stokes

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

expect the April report to bounce back after the relatively disappointing March

report, expecting a gain of 185,000 for headline payrolls, a 195,000 increase in

private payrolls, a 0.1pp tickdown in the unemployment rate to 4.0%, a softening

in in average hourly earnings (AHE) to a 0.2% gain, and average weekly hours to

remain at 34.5. Unless the report holds a considerable surprise, markets will

likely be paying less attention to the report and more attention to what the Fed

speakers have to say later on Friday.

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

--SOME DOWNSIDE RISK TO AHE

     Both markets and analysts expect average hourly earnings to rise 0.2%

month/month, leaving the year/year at 2.7%. In the last nine months, analysts

have shown a tendency to overestimate average hourly earnings, while markets are

mixed between over and underestimates. Overall, this gives a slight downside

risk to average hourly earnings. Further supporting the downside risk, the

average hourly earnings rise may be dampened by April's return to nice weather.

Last month, average hourly earnings shocked market participants expecting a

meager 0.1% rise, as it boomed in at 0.3%. However, this solid rise accompanied

a lackluster payrolls print, as some lower paid workers were forced to work

reduced shifts during March's unseasonably wintery weather. As these workers

return to the previously skewed labor force, the average hourly earnings may

suffer a softer gain.

--ANALYSTS AND MARKETS RECENT TREND OF LARGER OVERESTIMATES

     Analysts and markets are in general agreement for nonfarm payrolls, with

analysts expecting a 185,000 and the whisper number expecting 183,000. Since

March 2017, analysts and the whisper number have always missed to the same side

of nonfarm payrolls, with the number of overestimates and underestimates nearly

even. When analysts and markets do overestimate, they both typically miss to a

larger degree than when they underestimate. Analysts have an average

overestimate of 62,000 vs their average underestimate of 40,000. Similarly,

markets have an average overestimate of 79,000 vs their average underestimate of

40,000. Given the history of larger overestimates, if payrolls does come in

lower than expected by both analysts and markets, this could be a more upsetting

surprise.

--ANALYSTS' HISTORY OF UNDERESTIMATING APRIL PAYROLLS

     In the last 10 years, analysts have underestimated April payrolls in seven

of the last ten years, which should suggest an upside risk to the 185,000 gain

expected. Further, when analysts underestimate in April specifically , they tend

to miss to a larger degree than when they overestimate. The average

underestimate in the last 10 years is 63,000 versus the average overestimate of

35,000. Thus, if they do underestimate, they are more likely to miss by a larger

margin, adding to the potential for a larger than expected gain for April.

However, this trend of underestimating seems to have dissipated, with

overestimates in two of the last three years, and misses to both sides

narrowing. Further, as discussed earlier, there has been a recent shift towards

larger overestimates in the past year, perhaps suggesting an end to the

long-term trend.

--STICKY UNEMPLOYMENT RATE COULD FINALLY SLIP TO 4.0%

     Given the consistently tight labor market and generally strong payrolls

trend, analysts expect the unemployment rate to slip down to 4.0%. If this story

sounds familiar, that's because analysts have continued to forecast the new

17-year low for the past two months, each time disappointed as the unemployment

rate remains sticky. The rate has hovered at 4.0% for the last six months, the

second longest streak in the series history, following a nine month streak of

3.4% is 1968 - 1969. There has been a marked shift in the degree the

unemployment rate lowers in response to rising nonfarm payrolls, with the curve

flattening in mid 2015, as unemployment rate approaches 4.0%. Though analysts

have continued to be disappointed at the sticky unemployment rate, the chances

of finally tipping over to 4.0% seem increasingly likely as more and more

analysts move towards the consensus and last month's rate teetered at 4.07%.

--CONSTRUCTION SET FOR REBOUND

     A 15,000 plunge in construction workers dampened the March payrolls print.

However, this drop was largely due to poor weather that limited the number of

working days, and not indicative of any underlying change in construction

demand. Given April's relatively warm temperatures, construction should have

picked up, and should see a sizeable rebound. Further, as construction average

hourly earnings have consistently grown stronger year/year than total private

average hourly earnings, a large boost in the number of construction workers

employed may help bolster a solid average hourly earnings print. 

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

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

[TOPICS: MAUDS$,M$U$$$]