Why the Markets Are Hoping for a Weaker Payrolls Report

Jon C. Ogg

Friday’s unemployment and payrolls report from the U.S. Department of Labor is always important, but fit may have an even higher importance for the markets than previous reports. The market is operating under the fear that Fed Chair Jerome Powell is going to hike rates into oblivion, so the market may really want to see a less robust jobs report than has been seen in recent months.

Wednesday’s ADP monthly payrolls report came in stronger than expected, with 227,000 new payrolls added in October. CNBC had published a consensus estimate of just 189,000 for October. That means the 7.1 million job openings from the prior JOLTS report was still filling jobs at a rate faster than any layoffs were taking place. Small businesses were a tiny portion of the gains, with midsized and large businesses each dominating in a competitive environment for job hires.

One issue that may get in the way, or at least cloud the data, was any direct hurricane impact and some follow-on storm impacts from September. Just how much this will affect the report remains in question.

As far as Friday’s formal unemployment rate, Dow Jones is calling for a flat reading at just 3.7% for October. Dow Jones also is calling for a nonfarm payrolls gain of 188,000 in October. IBD’s Econoday consensus estimates were 3.7% for unemployment and 190,000 for nonfarm payrolls.

The gain in average hourly earnings is expected to be 0.2%, compared with 0.3% in September. And the average workweek is expected to remain flat at 34.5 hours.

What remains a mystery is just how strong the actual payrolls gains will be. The stock market probably is hoping for a number of 150,000 or less, similar to the nonfarm payrolls gain of 134,000 in September (and just 121,000 for private sector payrolls). The logic behind this is simple: a smaller gain is still positive for the economy but means less overheating that will keep Fed rate hike ambitions potentially muted.

Another factor is the labor participation rate, which was 62.7% in September and projected by IBD’s Econoday consensus to be 62.8% in October.

The markets have digested other mixed employment news this week as well:

  • The Challenger job-cut report was 75,644 in October, up from 55,285 in September.
  • The Bureau of Labor Statistics weekly jobless claims for last week was 214,000, compared with a revised number of 216,000 the prior week.
  • Productivity and unit labor costs were up 2.2% and 1.2%, respectively, for the third quarter. Both were within one-tenth of a percent of expectations, but compared with the prior report, productivity was lower and labor costs were higher.
  • The Employment Cost Index for the third quarter rose by 0.8% from the prior quarter and rose by 2.8% from the prior year’s same quarter.

One last report seen this week came from the National Association for Business Economics in its Business Conditions Survey. This only covers 127 members, and the dates of the survey were from September 26 to October 11. The net rising index (NRI) for wages and salaries remained strong, rising in October to a new all-time high, but the report showed that job growth was not as widespread during the third quarter of 2018 as in the previous two quarters. That report said:

Wage increases are likely to remain strong over the next three months, as the NRI for expected wage costs is also 56. … Less than one-third of respondents reports rising employment at their firms over the past three months, while 61% indicate hiring was unchanged. The forward-looking NRI is 29, down from 38 in July, but an increase from 18 a year ago.

What investors also need to consider is that consumer confidence has remained quite high despite the stock market selling pressure. Companies still had 7.1 million job openings as of the end of August, but there are persistent issues such as a skill gap, desired wages versus offered wages and even geographic impossibilities that may keep the lion’s share of those 7.1 million job openings open for longer than some economists and market watchers might guess.