US NFP Preview: 7 major banks expectations from October month’s employment report
With the calendar flipping over to November, the all-important October month’s nonfarm payrolls report is landing today. As the clock ticks by, here are the expectations as forecasted by the economists and researchers of 7 major banks regarding the upcoming employment report.
All the 7 major banks expect the October NFP to post a reading in between 200K to 350k, reversing a sharp drop of 33k seen in September. In addition, they expect the unemployment rate to hover in between 4.2% - 4.3% range for October.
In the view of analysts at HSBC, the nonfarm payrolls rose 300,000 in October, reversing a sharp drop seen in September. This month's release may shed some light on whether the sharp 0.5% rise in average hourly earnings in September was partly distorted by the hurricanes. The September report showed a sharp drop in food services employment which is likely to be reversed in October. Since average wages in the food service industry are lower than the national average, the temporary decline in jobs in this industry may have indirectly boosted the overall average for hourly wages. We expect that average hourly earnings were unchanged m-o-m in October. The y-o-y rate of increase could fall to 2.5%, down from 2.9% in September. In addition, we forecast the unemployment rate rose to 4.3% in October from 4.2% in September.”
Goldman Sachs’ economists estimate nonfarm payrolls +340k in October, above consensus of +310k and the 3-month average pace of +91k. Our forecast reflects solid underlying job growth and a sharp rebound in employment in hurricane-affected areas, as we estimate flooding and power outages reduced the level of September payrolls by approximately 180k. Unemployment rate forecast is 4.2%. For average hourly earnings: Increase 0.2% m/m and 2.7% y/y.
We forecast a 350k increase in nonfarm payroll employment for the October BLS employment report. This above-trend forecast reflects our expectation of a full reversal from September’s 33k decline. The increase of 350k in October would imply a two-month average of 159k, close to the pre-hurricane six-month average of 153k. Almost all of the weakness in the September report was focused in Florida, likely due to widespread but temporary power outages as opposed to permanent closure of businesses. This implies that a full reversal of September’s decline should be expected. Our nonfarm payroll employment forecast of 350k includes 340k from the private sector and a 10k increase from government. For manufacturing employment, corresponding with healthy regional survey data and manufacturing output as well as some reversal from September’s 1k decline, we expect an increase of 30k. Average hourly earnings (AHE) in September were likely boosted by transitory factors related to Hurricanes Harvey and Irma as aggregate weekly hours fell, likely driven by the recent hurricanes. However, there were upward revisions to back months, putting the y-o-y AHE rate back at the December 2016 level before the recent softness. However, we expect only a 0.1% (0.14%) m-o-m increase in October as wage growth returns to a more trend-like pace. In contrast to the establishment survey, the household survey showed a notable decline in the unemployment rate and an increase in labor force participation. Initial jobless claims have recovered back to pre-hurricane levels and continuing claims have decreased notably. Thus, we expect the unemployment rate in October to remain unchanged at 4.2%. Labor force participation, at its highest rate since March 2014, could remain elevated during the month.
We expect nonfarm payrolls to nearly fully give back its hurricane induced weakness and post a 330k gain. Uncertainty, however, is high with scope for a surprise in either direction, but on balance data in the past week on ADP and ISM do reinforce our above-consensus forecast. Our forecast assumes a 200-250k drag from the hurricanes, which we expect to recover to a significant extent in October. Previous hurricane episodes such as Katrina episode suggest a complete reversal in payrolls could be delayed, yet we believe the 2017 experience should be different given that jobless claims have fully recovered. With labor market indicators consistent with monthly payroll gains of 175-200k, October payrolls could easily print closer to +400k or higher. However, we are more cautious that the full rebound may not be realized until subsequent revisions, as has been the case in previous natural disasters. In addition, September payrolls have the potential to be upwardly revised. We expect the unemployment rate to remain at 4.2%. Average hourly earnings are expected to print a relatively weak 0.2% m/m increase, though there is risk for a softer 0.1% rise taking into account calendar effects and hurricane distortions. That would push the annual pace lower to 2.7% y/y, or 2.6% y/y if downside risks are realized. Consistent with the November FOMC statement, the Fed is likely to look past any softness in this report that might be attributed to residual hurricane distortions. A solid pickup in payrolls and a low unemployment rate should reinforce expectations for a December rate hike.
In practice, data are going to be heavily affected by the September hurricanes. After last month’s 33k fall in payrolls, we expect a 200,000 bounce, but that still leaves the 3-, 6- and 12-month growth rates slowing. And after a jump in wage growth to 2.9% (due to lower-paid workers being more likely not to get paid at all at times like this), a correction to 2.7% seems likely. Still, as the chart below shows, if we look at the relationship between the employment rate and wage growth (instead of unemployment, which is more distorted), wage growth is responding to a rising employment rate. Much more of that and maybe the bond bears will have their day in the sun.
We estimate employment growth in October was 300,000, as other indicators have shown the labour market has recovered following the hurricanes. Note the very strong wage growth of 0.5% m/m in September was due partly to compositional effects, as the 'leisure and hospitality' sector (typically low wage growth jobs) was the sector most severely hit by the hurricanes. This could potentially have added up to 0.1pp to wage growth and we expect this effect was reversed in October. Hence, we expect a correction, now people have returned to their jobs, so we think wages rose 0.1% m/m in October.
The 33k jobs the US lost in September was not a statement about the economy as the impact of the storms. October's recovery is expected to be sharp. The median forecast in the Bloomberg survey is for a 310k increase in non-farm payrolls. We suspect the risk is on the upside. Before September, the non-farm payrolls averaged 171k a month this year, and that was the pace over the three months through August. We would not be surprised to see print more than 350k.
Click here to read more about the NFP preview from our Chief Analyst Valeria Bednarik titled “Nonfarm Payrolls Preview: not a game-changer for Fed, but set to rock the market anyway”