Due out Friday morning at 8:30 AM ET is the December nonfarm payrolls report from the BLS, and the release of the FOMC minutes Thursday afternoon from the Federal Reserve's latest policy meeting just made it a lot more interesting.
The Fed recently announced that it would tie its interest rate policy guidance to a 6.5 percent unemployment rate threshold – meaning unemployment data has taken on special significance for markets. Thursday's FOMC minutes release revealed, however, that the Fed is already discussing scaling back or ending quantitative easing as soon as later this year, which makes the course of employment data even more important for markets in the short term.
The consensus estimate among Wall Street economists is for a 153K rise in nonfarm payrolls in December after a 146K gain the month before.
Private payrolls are expected to rise 150K after adding 147K in November, and manufacturing payrolls are expected to rise by 5K after falling by 7K in November.
The headline unemployment rate is expected to stay unchanged at 7.7 percent.
Deutsche Bank's Chief U.S. Economist, Joe LaVorgna, wrote in a note Thursday that he expects the unemployment rate to actually tick up slightly on Friday morning:
In regards to December nonfarm payrolls, we currently anticipate +150k on the headline (+165k private) and a one-tenth increase in the unemployment rate (to 7.8%). This would be in line with the average over the past 12 months (151k). As we have previously written (US Economics Weekly, December 14), based on the trend of the past several years, we estimate that the unemployment rate will reach 6.5% by H2 2014. This is earlier than what the Fed’s central tendency forecasts imply, which suggest sometime in 2015.
On Thursday, ADP's monthly payrolls report blew by expectations. ADP says 215K private-sector jobs were created in December, well above estimates of a 150K gain.
The number caused BofA Merrill Lynch economists Michelle Meyer and Ethan Harris to bump up their estimates for Friday's nonfarm payrolls report. They wrote in a note to clients Thursday:
While we are cautious in reading too much into the signal from ADP, we don’t want to dismiss it entirely. Even if there is an upward bias, it is still significantly above our initial forecast of 100K for private payrolls and 90K for total jobs. In addition, the employment index from the ISM manufacturing survey improved, suggesting an uptick in manufacturing jobs. And lastly, the continued gain in housing construction suggests hiring in the sector, particularly after the surprising decline in construction jobs in November. We are therefore revising up our forecast to 130K for total payrolls and 140K for private payrolls.
However, Meyer and Harris say their estimate for Friday's nonfarm payrolls is still below consensus:
Despite our upward revision, we remain below the consensus forecast of 150,000 for NFP. We feel comfortable with this forecast for three reasons. First, we anticipate retail hiring to be soft given the rapid gains in retail jobs over the prior three months. This is consistent with the strong start to the holiday shopping season but sluggish end. Second, business and consumer confidence remained weak in December, likely related to the fiscal cliff. And finally, initial jobless claims, after accounting for seasonal factors, are hovering at pre-Sandy levels.
Citi economist Steven Wieting parses the latest jobless claims data, released in the U.S. on a weekly basis, to come up with a nonfarm payrolls forecast of 140K new jobs in December:
Claims in the month of December averaged about 360,000 (a couple of days are needed to pro-rate the actual monthly reading). This marked a monthly cycle low as is typical of early-to-mid cycle recoveries. However, at 360,000 the claims pace is only consistent with moderate employment gains. With claims at 368,000 at the mid month survey period, we expect total non-farm employment rose 140,000 in December.
Morgan Stanley economist David Greenlaw is perhaps one of the most bullish heading into Friday's nonfarm payrolls report. He forecasts a 185K gain in nonfarm payrolls, owing to payback from Hurricane Sandy:
Although the BLS indicated that Hurricane Sandy did not “substantively impact” the November employment data, we suspect that the effect on payrolls was at least -50,000. We arrive at this conclusion based on the big move in our favorite proxies for weather-related influences on the data and an analysis of the state-by-state breakdown that was released a couple of weeks after the national report. The state data showed that jobs declined by 40,000 in the NY/NJ region, while rising about 140,000 in all other states. We suspect that many of the businesses that were forced to close in the aftermath of Sandy were reopened by the time the December survey period arrived. This factor is expected to help boost the payroll tally relative to the 2011-12 trend of about +150,000 per month. Finally, a partial rebound in labor force participation this month should contribute to an unchanged reading for the unemployment rate.
However, Societe Generale economist Brian Jones is even more bullish. He forecasts a 225K gain in nonfarm payrolls and expects the unemployment rate to fall to 7.6 percent.
In addition to the improvement in various other labor market indicators cited by others, Jones sees weather conditions providing a pickup:
On the technical side, a dramatic swing in weather conditions between canvasses will likely provide a significant lift to observed job creation in several industries including construction and manufacturing. The breadth of job gains across industries, as measured by the BLS’ one- month diffusion index, had been expanding fairly rapidly over the August-October span and the reported November dip likely represented only a temporary pause. The number of persons unable to work because of bad weather from the household survey, our proxy for the impact of climatic conditions on hiring, soared to 369,000 in November – a record for that month. Our NFP forecast incorporates a halving in that variable to 186,000, matching the average December reading over the 2007-11 span. That assumption could prove conservative. Indeed, at 695, the number of heating degree days in December was 122 below normal.
The monthly nonfarm payrolls report will be released Friday morning at 8:30 AM ET. Follow the release LIVE on Money Game >
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