U.S. job growth should post a rebound in October from a lukewarm September. We at Action Economics expect the government's employment report for October, scheduled for release Nov. 3, to reveal that the headline nonfarm payrolls figure rose 135,000, slightly above economists' median forecast of 125,000 new jobs and close to the 137,000 average 2006 gain. Job growth should move closer to trend after the disappointing 51,000 addition for September.
Last month's announcement that monthly payroll figures for the year will be raised significantly with the Bureau of Labor Statistics' annual benchmark revisions to employment data makes it even more important than usual that the markets should monitor the full mix of figures in the report, and not just payrolls.
A bounce in payroll growth from September, even to a still lean rate, alongside strength elsewhere in the report, would be a good sign for the U.S. economy in the fourth quarter, after some disappointing data in other segments.
The most important detail in the September report was that the preliminary benchmark revision for the level of payrolls in March, 2006, will be revised up a whopping 810,000. This suggests that average payroll growth from April, 2005, through March, 2006, will be revised up by 68,000 a month. This implies that the current monthly payroll growth average over the period?? lean 169,000??ill be raised to a robust 237,000.
Here are the factors that helped us put together our forecast for October:
There has been a downshift in hiring over the last two quarters, from a robust rate in the first quarter. Payroll growth averaged 165,000 per month in 2005 (which should increase to 216,000 post-revision) and 176,000 per month in the first quarter of 2006 (244,000 post-revision), before dropping back to a 118,000 average monthly rate (186,000 assuming benchmark gap has continued since March) over the last six months.
Three industries stand out as accounting for much of the slowdown in payrolls over the last two quarters:
??he sharp slowdown in residential construction activity has resulted in a moderation in construction payroll growth, with monthly average growth of 7,000 over the last six months vs. the hefty 25,000 average gain over the prior two years.
??etail trade has increased in only two out of the last nine months, with a cumulative decline over the period of 104,000. The last time we saw a worse stretch was in the first half of 2003.
??he bellwether "temp" employment series has dropped in five out of the nine months of 2006??osing 36,000 jobs. This is also the worst stretch since early 2003. The temp series is viewed as a leading indicator for broader employment trends, given the ease of hiring and firing these workers. As such, the October update will be an important real-time indicator of whether this series is extending the pattern.
The household survey
The household measure of job growth (used to derive the unemployment rate) has revealed average monthly job growth in 2006 at a robust 222,000, which is more in line with the payroll figures we expect after the annual revisions. As we frequently noted even before last month's payrolls footnote, the household survey is less subject to annual revisions, so even though it's more volatile on a month-to-month basis, diverging trends over time are a good indicator of likely impending payroll adjustments.
Wage growth on a year-over-year basis has risen steadily since the start of 2004, and it appears that compensation cost growth this year has gained steam. Both nominal earnings and real earnings are up from the cycle trough, though the real earnings figures are now starting to benefit from less of a drag from rising commodity prices. Given the tight labor market and continued strength in various inflation measures, we expect a continued elevated trajectory for nominal earnings.
Forecasts and revisions
Median payroll forecasts have drifted lower to meet the slower reported pace of hiring in 2006. Through the first eight months of the year, the average median forecast was 182,000 vs. the average "as-reported" figure of 153,000. September revealed another large shortfall in the "as-reported" relative to the median. But it appears that the market is viewing the September shortfall as a one-off event, rather than tracking that miss lower. But another "surprisingly" weak print in October would likely drag median forecasts down further through yearend.
Historically, October reveals the strongest level of not-seasonally-adjusted job growth in the second half of the year. Given present cross-currents in the market, there's little reason to expect a big swing from the seasonal pattern.
Other job-market indicators
Weekly initial jobless claims in October have a month-average level at a lean 306,000, from 314,000 in September, 317,000 in August, and 313,000 in July. The data are consistent with a solid labor market, and support some upside risk for October payrolls.
The current-conditions series from the University of Michigan's consumer-sentiment and the Conference Board's consumer-confidence figures revealed diverging swings again in October, but generally reside at levels consistent with a robust labor market. The current series from Michigan surged to 93.6, from 85.4, while the current series from the Conference Board moderated to 124.7, from 128.3??ith the "job-strength" component derivation showing a notably weaker trend relative to the first half of 2006.
Nonetheless, nearly all of the sentiment measures have revealed a notable improvement over the last couple of months, reflecting the drop in energy prices, lower interest rates, and higher stocks prices. The improvement here may suggest some increased optimism for business managers as well, and may translate to a pick-up in hiring on the month.
Right on Track The employment components from the factory-sentiment surveys have been mixed in October, implying risk of no big change on the month relative to recent trends. Recent trends in the Help-Wanted Indexes have been consistent with a slowdown in job growth.
The September Challenger job-cut survey, released Oct. 3, jumped to 100,300, which represented a 40% year-over-year increase, the largest increase since July, 2005. The rebound in the October ADP survey to 128,000 from 78,000 and the 0.9% rise in the October Hudson Employment Index to 101.4 bode well for our forecast.
The degree of bounce in payrolls in October from the restrained September figure will be watched closely by the markets. As we always note, it's the full mix of figures from the report that should be monitored rather than just payrolls, and this is particularly true until we get the benchmarked data in February.
Federal Reserve policymakers will be keeping a close eye on the October report, but unless there's a big upside surprise in job or wage growth, Bernanke & Co. should be able to stick to their current policy track and keep the "pause" button pressed for the next several months.