By Sandeep Kanihama
Here are the NFP expectations as forecasted by the economists and researchers of 8 major banks.
All the 8 major banks expect that the February NFP to print a number in between 185K to 225K while they expect the unemployment rate to slip back to 4.7% from 4.8% in January.
While we acknowledge a somewhat tenuous link between ADP and payrolls, the magnitude of this week’s positive surprise—in conjunction with continued very low initial claims numbers and other supportive indicators—lead us to expect a modestly better job creation number for Friday's nonfarm payrolls. We now look for an above-consensus 225K print for February, from our original forecast of 205K. Labor market indicators across the board point to monthly payroll gains north of 200k—a step up from the recent trend as indicated by the 3- and 6-month moving averages. The unemployment rate is expected to slip back to 4.7% from 4.8%, which would likely be accompanied by a pullback in the labor force participation rate. We also expect a 0.3% m/m pickup in average hourly earnings in February, leading the year-on-year pace higher to 2.7% vs 2.5%. With the reference week ending on a Sunday, calendar week distortions suggest at least a solid 0.2% m/m print. But coming after the relatively weak 0.1% increase in January, which was partly driven by an unusual 1.0% m/m drop in financial activities, there is scope for a stronger bounce back.
The US February jobs report (14:30 CET) will be scrutinised intensively following the recent speculation about the prospect of a Fed hike on Wednesday next week. At the moment, it seems that it would take a significant downside surprise to keep the Fed from hiking. We estimate a non-farm payroll of 190,000, although Wednesday's strong ADP report suggests that risks to this estimate are on the upside. Furthermore, we expect to see some reversal in average hourly earnings after weakness in wages in financial activities dragged them down in January. We estimate average hourly earnings increased by 0.3% m/m and 2.8% y/y in February and that the unemployment level remained at 4.8%.
Payroll growth accelerated to 227k in January its biggest rise for five months and well above 2016’s average monthly rise of 187k. Other indicators such as weekly jobless claims suggest that this strength has continued in February, so we forecast another solid rise of 185k. That should be enough to push the unemployment rate down to 4.7% from 4.8%. Earnings growth will also be watched closely by markets after an unexpected slowdown in January. We think that deceleration was temporary and expect annual wage growth to pick up to 2.8% y/y from 2.5% in January.
The payroll report is slated to come out during the Fed communications blackout (ahead of the March meeting). The headcount numbers (NFP) should continue to come in near trend of 200K. Jobless claims continue to plumb the depths (at 223K, they just hit yet another cycle low and record low in LF-adjusted terms), employment metrics from business surveys continue to perk up (look at hiring intentions from the small business space), and job openings continue to register in the 5 million neighbourhood. We think wages will be the linchpin to whether the Fed “likes” this report enough to vindicate hiking in March. Given the lacklustre 0.1% m/m in average hourly earnings in Jan, you wouldn’t know that nearly 40% of US states had increased their minimum wage rates substantially. Given the number of folks impacted, this should have translated into a 0.3% boost to AHE. Note that we didn’t even see this play out in production worker wages, which rose 0.18% on the month. So it’s possible we get some payback here via either an upward revision to the January read or a much firmer February.
In February, we expect goods-producing payrolls to have grown by 30,000, service-producing payrolls to have risen by 152,000 and the government sector to have added 3,000 jobs, implying a total non-farm payroll gain of 185,000. This is roughly in line with January’s 3, 6, and 12-month moving averages of 183,000, 183,000 and 195,000, respectively. The unemployment rate moved up 0.06pp in January to 4.8% after hitting a cycle low of 4.6% in November 2016. In February we expect it to have moved down 0.1pp to 4.7%. This assumes a flat participation rate (62.9%) following a 0.2pp increase in January.
Today in the United States, the focus will be on employment numbers and available leading indicators continue to suggest that job creations will remain strong in February. All in all, we forecast total NFP to increase by 185K (195K for ADP) after 227K in January. This employment change, along with an expected slight decrease in the participation rate, should push the unemployment rate lower from 4.8% to 4.7%. Average hourly earnings should accelerate during the same month (+0.3% MoM, 2.8% YoY). Lastly, we expect a widening in the trade balance from -$44.3Bn to $46.0Bn in January in line with the already available advanced report.
It will likely take a triple play of below-trend growth in payrolls, an uptick in the unemployment rate not driven by an uptick in the participation rate, and no acceleration in average hourly earnings to dissuade the FOMC from raising rates five days after. But, we expect opposites will occur on all three fronts, making the Fed feel even more confident about labour market conditions continuing to improve (thus, sealing the deal on a March 15th rate hike). We look for nonfarm payrolls to expand by 200k in February. Although slightly below January’s 227k print, this is still comfortably above recent average gains (3- and 6-months at 183k, 12-months at 195k), implying a pickup in the underlying hiring trend, and reflecting, in turn, the post-election surge in business optimism. This payrolls rise should translate into a onetenth reduction in the jobless rate to 4.7%. There’s a chance this could remain at 4.8% if the participation rate drifts up a tenth to match its near 3-year high of 63.0%, which we suspect the FOMC is okay with. Finally, wage inflation should return to at least 2.7% y/y in February, from 2.5% in January, as what the Beige Book referred to as “tight” labour markets exert at least some modest upward pressure (+0.2% m/m) on average hourly earnings.
The US labor market continues to gradually improve. The weekly jobless claims are at new cyclical lows, and due to qualification changes, the figures are not directly comparable to the earlier cycles, but the direction is clearly constructive. Continued improvement is likely, and it will be more likely as wages increase. We often explain what given the size of the US workforce, why hours worked is a key metric that the popular media tends to largely ignore. However, in the current environment, we suggest that average hourly earnings (and other measures of wage pressure) are an important metric that investors will want to track closely. The median forecast in the Bloomberg survey is for average hourly earnings to rise by 0.3% in February to 2.8% year-over-year. If there is a surprise, we suspect it to be on the upside. The comparison to last February is favorable as hourly earnings were flat in tow months in 2016, February and November. The median forecast on the headline non-farm payrolls is expected to be around 190k. In 2016, non-farm payrolls rose by an average of 187k.