MNI DATA PREVIEW: Payrolls To Rebound; Hourly Earnings To Slow

By Sara Haire and Holly Stokes

HIGHLIGHTS

-Analysts divided on how strong nonfarm payrolls will rebound, with roughly

two-thirds expecting an increase of 300,000 or more, and one-third expecting a

gain in the 200,000s.

-If median nonfarm payroll forecast of 315,000 gain is correct, and there are no

revisions, September and October average would be a 141,000 increase - lower

than September and October average for past six years.

-Unemployment rate expected to stay at 16 year low of 4.2%.

-Average hourly earnings to retreat to still strong 0.2% rise, after September's

0.5% surge from hurricane skewed labor composition. This would lower the

year/year rate back to 2.7% from 2.9% in September, barring revisions to

previous months.

-Continued strength in hourly earnings could help push through December rate

hike, while weakness would be positive for fixed income and negative for the

dollar.

     WASHINGTON (MNI)- While the median expectation for October nonfarm payrolls

is a strong 315,000 gain, analysts remain at odds over just how much the Friday

report will rebound from September's 33,000 decrease - with a range of 200,000

to 350,000. Analysts expect private payrolls to make up a significant share of

this gain, with expectations for an increase of 311,000.

     Although payroll gains may excite, the unemployment rate and average work

week are expected to remain unchanged at 4.2% and 34.4, respectively, as the

average hourly earnings retreats to a still solid 0.2% increase, after

September's hurricane-driven 0.5% surge. 

     The large range in nonfarm payroll forecasts is due to uncertainty if

payrolls have fully recovered from the significant hurricane drag seen in

September. Roughly two-thirds of analysts in MNI's survey expect payrolls to

post a gain of 300,000 or higher, while one-third anticipate a slightly slower

return to trend. 

     Forecasting a 350,000 spike in payrolls, Capital Economics sights initial

jobless claims falling to a 44 year low as evidence of the full and fast

recovery. Barclays and BMO explain that given the hurricane induced 111,000 drop

in September in the leisure and hospitality sector, a return to pre-hurricane

levels, in addition to on-trend growth, would yield a gain of 325k or 330k,

respectively for the two firms.  

     While all analysts forecast a solid rebound, many are less certain if

October payrolls will recoup the full September loss, and consequently believe

the gain will be in the 200k range based on past hurricane timelines. 

     In the aftermath of Katrina, industries hit harder took at least two months

to recover, and given the extent of damage and flooding, analysts such as

Deutsche Bank expect that this season's recovery will follow the same pace. Also

concerned by historical evidence, Societe Generale forecasts the survey low of

200,000, but admits that there is an upside risk to their estimate.

     If the median forecast of a 315,000 gain is correct and there are no

revisions, this would yield an average of 141,000 for September and October -

below what would be the October 2016 - 2017 average of a 175,000 increase. The

two-month average of September and October would also sit below the two-month

averages of September and October for the past six years, indicating the jump

would not completely offset the September loss.

     This low two-month average could simply be the result of a longer

normalization. However, Credit Suisse cautions that, even beyond the effects

from the storm, employment growth appears to have slowed recently - as the six

month job growth average from August to March slowed to 153,000 vs the 2014-2016

average north of 200,000. However, Goldman Sachs disagrees, stating that jobless

claims are evidence of a solid underlying pace. 

     Last month, analysts were surprised when the household survey measure of

employment was estimated to have increased by 906,000, outpacing the 575,000

surge in the labor force - and causing unemployment to fall to 4.2%, its lowest

since early 2001. This month analysts are uncertain as to whether unemployment

can maintain this low rate as the household survey normalizes, or if it will be

forced up slightly. 

     However, Morgan Stanley states that there is actually a downside risk to

this forecast. They argue that if participation rate falls as expected while

household employment manages to maintain some of its momentum, that unemployment

could fall as low as 4.0% in October. While Capital Economics does not

anticipate this print just yet, they argue that the surveys do at least suggest

further decreases towards 4% in the months ahead.

     The flipside to the spike in payrolls and a low unemployment rate is that

those returning to the workforce are low-wage workers. As Credit Suisse and BMO

note, the hurricanes pushed much of the lower paid leisure and hospitality

sector to temporarily drop out of the average for September, causing a 0.5%

spike in the average hourly earnings. 

     As these workers return, the wage rate likely won't be able to post such

large gains, potentially even remaining unchanged. CIBC expects that if a flat

reading occurs, the annual rate of earnings will fall back to 2.5%. However,

Morgan Stanley believes that earnings growth will remain strong, even accounting

for the normalization of the composition of the labor market.

     The forecasted 0.2% monthly gain for hourly earnings, barring revisions to

past months, would put the year/year rate to 2.7%, down from 2.9% in September.

     After their two-day meeting, the FOMC announced they would raise rates in

November. If Morgan Stanley is accurate in that earnings continues to trend

upwards, and unemployment remains low while participation rate is high, the

caution light should turn to a go-ahead green for a December rate hike. 

     But, if earnings are unable to show continued strength, CIBC cautions that

markets will realize that last month's strength was superficial, which will be

positive for fixed income and negative for the dollar. 

     Looking ahead, with labor markets continuing to tighten, analysts expect

that future months will experience a slowdown in payroll growth, but a rise in

average hourly earnings.

--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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