Release: Non-Farm Employment Change (Dec)
Consensus Forecast: 150K
FXTimes Forecast: 180K
Date/Time: 1/06/12 8:30AM ET (13:30 GMT)
Overall the Consensus Expectations of 150K May be Slightly Below Expectations
Bringing together the very strong positive surprise in the ADP employment change figure, a downward trend in jobless claims, a better employment reading from the ISM manufacturing index, and a rather steady reading from the employment sub-gauge in the ISM services index I come to the conclusion that the consensus forecast for a 150K gain may be undershooting the real figure.
However in my preview of the November NFP - Preview: Non-Farm Payroll - Is NFP Leaning Towards Positive Surprise? - I came to a similar conclusion and while NFP met expectations the positive surprise came in the form of upward revisions to previous months' data. Therefore we may want to look out for a similar scenario to play out for December's report.
Here's a look at NFP and Unemployment Rate from November:
ADP Employment Change Shows Surge in Private Payroll Hiring
The December ADP employment change figure certainly surprised forecasts jumping 325K for the month, compared to expectations of around 160K - so nearly doubling the forecast figure.
The gains mainly came from increases in small and medium-size businesses, dwarfing the the increases in large companies.
In any recovery its positive to see gains coming from small and medium-size businesses as they historically lead the way in terms of job growth. From the breakdown above we also see that while services producing industries gained 273K jobs, manufacturing saw a 22K increase.
The ADP employment change has been known to misfire in terms of predicting accurately the non-farm payroll figure, but it's still a valuable leading indicator and will be taken as an indication that December's NFP report may be stronger than November's 120K and stronger than the consensus forecast.
The ADP employment change tends to overshoot the NFP figure so we subtract around 30K to account for that and with around 25K jobs lost in government per month over the last year and a half we can slice a total of 55K from the headline ADP reading to come to a figure of 270K for NFP. This would be a very strong reading and much higher than the consensus forecast, and we are wary to think that the US economy will add that many jobs in December.
While we should look at today's ADP change with some caution, it's still an optimistic sign for tomorrow's non-farm payroll report.
Jobless Claims Remain in Downward Trend
Looking at jobless claims - our other key leading indicator for non-farm payrolls - we continue to see a downward trend, which again is a positive sign for the December non-farm payroll report.
We got our latest reading on jobless claims on Thursday and it showed a drop to 372K from from the previous weeks 387K. Again that's a positive sign and the four-week moving average, the red line in the above chart, continue to trend downward. That's pretty much 3 months in a row of a downward trend in the less volatile four-week moving average of claims and tells us that NFP should be stronger than they were in November - again consistent with the consensus forecast.
ISM Manufacturing Report Supportive of More Jobs, Services Report Steady
We have two more measures that we can use to help gauge what the upcoming NFP report, to add some more context to the ADP and claims data, and they are the employment sub gauge within the ISM manufacturing and non-manufacturing indexes.
In the manufacturing index we saw employment register a strong 3.3 point increased to 55.1 - a positive sign for the manufacturing sector. We'll see if it translates into more jobs from the NFP report. The ADP report showed manufacturing up 22K.
Looking at the services sector we see the employment sub-gauge continue to run below the 50 level separating expansion from contraction meaning that we shouldn't necessarily see a big jump in expectations for services sector hiring from this index.
As we could see in the breakdown of the establishment survey below manufacturing added only 2K jobs in November, therefore a increase in manufacturing employment would be a nice positive development.
The services sector meanwhile showed a gain of 146K in November. Judging from the ISM services index activity may not have improved enough to warrant further hiring, while the ADP report shows a strong gain in the services sector (retailers hiring for the holiday shopping season?). We therefore expect a better print from services, but the gains may be temporary.
Conclusion - Can US Growth Story Counter-balance European Concerns?
Combining all the data together, we see the prospect of NFP beating expectations outweighing the prospect of NFP coming in below expectations. Better-than-expected print would continue the growth divergence story in North America - that the US is decoupling from the rest of the world - something we don't think can last very long. The economic data from the US has however been better over the previous couple of months and would mean that the FOMC does not have the data in front of it to conduct further monetary stimulus (yet).
It therefore could help to bolster the medium and longer-term fundamentals for the USD, thought at the same time a positive surprise would help risk appetite and therefore stocks and commodities and by extension higher-yielding currencies against the USD in the short-term. We therefore look for equities to be stronger following the release, which can support currencies like the Australian, New Zealand, and Canadian dollars which were much weaker in the Thursday trading session.
On the flipside, a worse than expected report will increase risk aversion, boost the value of safe haven assets like the USD, and weaken further commodity currencies. They will add another layer of concern to the legion of worries we already have in financial markets as it could mean that the US momentum that we have seen over the last couple of months may be waning.
Can the US growth story act as a counterweight to the problems in Europe? We'll find out more following the release of the NFP report.