US DATA PREVIEW: August Payrolls To Be Strong, But Cooling

Repeats Story Initially Transmitted at 11:35 GMT Sep 1/07:35 EST Sep 1

By Holly Stokes and Sara Haire

     WASHINGTON (MNI) - Analysts expect the August nonfarm payrolls report to

deliver a strong, albeit cooled off, gain of 180k, but analysts are divided in

their expectations of the degree to which August has slowed from last month's

209k and June's 231k strong headline numbers.

     Several analysts point to strong indicators in justifying expectations for

another robust gain at a 200k level. Barclays cites the near historically low

levels of jobless claims in July and August as reason to believe that a "subdued

rate" of separation could mean yet another month of solid growth for payrolls.

Credit Suisse also forecasts a sustained 200k gain, due to positive leading

indicators, higher job vacancies, and a new cycle high for the "labor

differential" calculated from the Conference Board's consumer confidence survey.

That closely-watched measure rose to 18.1 in August from 14.5 in July and was

well above the 4.0 measure a year earlier.

     Additionally, with Amazon's aggressive hiring schemes in the first two

weeks of the month, analysts at J.P. Morgan and Deutsche Bank look for surges in

e-commerce, trade, transportation, and utilities sectors. Despite Amazon's

promise of 50k new hires, analysts caution that the actual number will fall

short of expectations. 

     Private payrolls, which Deutsche Bank states will be the single driver of

gains in headline payrolls, are forecasted at 184,000, down from July's 205,000

- but still in line with a solid gain for payrolls. On Wednesday, the ADP

national employment report saw a significant 237,000 rise, after an upward

revision to 201,000 from the originally reported 178,000 gain. This large rise

in the private payroll number ahead of the employment report is significantly

higher than the 184,000 gain forecasters are predicting in the the MNI survey. 

     In the past few months, ADP's headline number has been falling short of

real private payroll growth as reported by the BLS, though ADP has revised their

numbers upwards significantly in the past two months. However, there is a risk

that will change in August. The larger-than-expected gain in ADP this month

echoes a similar scenario last year, when ADP's headline number came in

significantly ahead of the BLS's initial print. While later revisions corrected

this, it was still a downside surprise.  

     Even with these strong indicators, many analysts believe there will be a

more tempered gain in August, largely due to August's recent history of

overestimates. The past six August nonfarm payrolls have been overestimated, by

43k on average - and several analysts are starting to take this history into

account. Out of the last ten years, nine have been overestimated making it a not

so subtle trend of overestimation. Deutsche Bank states that this tendency to

overestimate August has offset what would have been an upside risk to its

headline payroll forecast of 185k. Additionally, J.P. Morgan warns that August

tends to post below-average gains, noting that since 2000 the average monthly

gain has been around 185,000, while August's average has been only 154,000. 

     While August's history of overestimates has depressed some analysts'

forecasts, others, such as Credit Suisse, believe the past six years are only a

coincidence - and continue to forecast for a third consecutive gain of 200k or

higher. Analysts at Capital Economics recognize that some expectations will be

softer because of longstanding problems with the August data, but assert that

the overestimates are due to a substantial margin of error when estimating

August data. 

     However, even if August's history of overestimates is only a coincidence,

analysts have other reasons to expect a more moderate gain. Morgan Stanley

explains that a softer gain may be due not to problems of demand, but supply -

noting continued reports of skilled labor shortages. Sustaining this concern,

July's NFIB Small Business Survey reported a near-record high percentage of job

openings with no or few qualified applicants. This labor shortage underlies the

cautions of Westpac and other analysts that, after reaching a point past full

employment, 200k+ payroll gains are no longer sustainable.

     Analysts generally agree that the 4.3% unemployment rate seen in July will

be unchanged in August, with some believing that it could slip even further to

4.2% this month or in the months to come due to the prevalence of reports from

companies unable to fill positions. The 4.3% unemployment rate seen in July was

already below Fed officials long-run estimate of sustainable full employment. If

the unemployment rate does fall to 4.2%, this would be the lowest rate since

January 2001, which Bank of the West claims would more than compensate for below

target inflation - allowing the FOMC to carry out original plans for balance

sheet shrinkage and another rate hike before the end of the year. Capital

Economics echoes this point, stating that unless there is a major upset in

payrolls, unemployment rate should be the major focus for the Fed.

     Low inflation readings are also leading analysts to closely watch average

hourly earnings. While most analysts anticipate a 0.2% gain in average hourly

earnings with the average work week remaining unchanged at 34.5 hours, Morgan

Stanley notes that there has been a trend of gradually rising wage growth since

the slowdown at the end of last year, suggesting a potential increase in hourly

earnings. And, should average hourly earnings climb 0.3%, as some analysts

forecast, Capital Economics believes that this will give the Fed an indication

that a rise in core inflation will soon follow. CIBC notes that an upward miss

for wages should be negative for fixed income and positive for the dollar.

However, TD Securities cautions that market response will likely be softened by

continued concern in low inflation and political risks.

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com