Ahead Of Friday's Nonfarm Payrolls

This week’s payrolls report comes on the heels of some disappointing data, which has fuelled fears that the U.S. economy may be losing momentum. In particular, the pullback in March hiring in the ADP report and ISM survey suggests a downside risk to Friday’s figure.

Last month, nonfarm payrolls shocked the markets -- to the upside. Total nonfarm payroll employment increased by 236,000 in February (versus +119,000 revised January), and the unemployment rate edged down to 7.7 percent (versus 7.9 percent January), according to the Employment Situation report compiled by the U.S. Bureau of Labor Statistics. Job gains were seen predominantly in professional and business services, construction, and health care.

ADP Numbers Disappoint
According to the March ADP National Employment Report, private-sector employment increased by a fewer-than-expected 158,000 jobs from February to March, the smallest increase since October 2012. The median forecast of 39 economists surveyed by Bloomberg called for a 200,000 advance. Estimates ranged from gains of 170,000 to 240,000.

The … majority of the new jobs [were] created by service providers, said Carlos A. Rodriguez, president and chief executive officer of ADP. Mark Zandi, chief economist of Moody’s Analytics, said, Construction employment gains paused as the rebuilding surge in the wake of Superstorm Sandy ended. Anticipation of Health Care Reform may also be weighing on employment at companies with close to 50 employees. The job market continues to improve, but in fits and starts.

The ISM Non-Manufacturing Employment Index registered 53.3 percent in March, which reflects sector growth for the eighth consecutive month, but a decrease of 3.9 percentage points from February. Twelve industries reported increased employment, including Construction; Accommodation Food Services; Transportation Warehousing, and six industries reported decreased employment, including Mining; Real Estate, Rental Leasing.

Friday's NFP Expectations
The nonfarm payrolls report due on Friday is expected to show employers hired a net 195,000 workers in March, according to the median forecast of 87 economists surveyed by Bloomberg.

Last month saw an end to the political wrangling on sequestration. Across-the-board automatic spending cuts will slice $85 billion from a $3.6 trillion budget over the seven months spanning March-September. While the Congressional Budget Office (CBO) estimates that the measures passed will cost 750,000 jobs and lower economic growth by 0.6 percent by year-end, the full impact of sequestration has not been felt yet. In fact, sentiment has likely improved since the Republican-Democrat squabbling came to an end, which could boost private payrolls.

Government payrolls are expected to have dropped by about 9,000 after falling 10,000 in February. Whilst many government agencies are implementing furloughs (forced unpaid days off), the nonfarm payrolls survey counts anyone who was paid in the reference period as employed -- which means employees put on furloughs will still be included in the payroll total. In addition, most agencies are required to give one month’s notice before furloughs begin, suggesting it is too soon for any effects to be felt.

It is too soon for any impact [of the sequester] to show up in March’s data, Paul Dales at Capital Economics said in a note to clients. But there’s little doubt that the $85 billion of government spending cuts that were enacted at the start of March will have some impact on the labor market, Dales added.

The Small-Business Effect
A number of recent smaller surveys (e.g. PNC Economic Outlook, Intuit Inc. Small Business Indexes) have suggested that small business hiring is slowing. While a sense of ‘cautious optimism’ is referenced in a number of these reports, it seems a majority of small businesses are looking to hold off from hiring during the next six months. Reasons offered include the ability to do more work with fewer employees, business regulations, and increasing health insurance costs related to ‘Obamacare’.

There are also concerns about the construction sector. The ADP report indicates that construction employment may have been weaker in March as rebuilding after Superstorm Sandy came to an end. However, the ISM survey suggests otherwise; according to their findings, construction saw the greatest increase in employment during March. The jury is still out on this one…

Recent Fed comments on the employment outlook have been varied. On Thursday, Fed’s Evans mentioned in a joint public debate with Fed’s Lacker that the Fed was still “missing tremendously” on the employment side of its dual mandate, while its other charge, inflation, was under control. Fed’s Dudley concurs; he recently stated that the Fed must remain very accommodative because the labour market remains “far from healthy” in spite of some recent overall economic improvement.

Coherent Signs Of Improvement
On the other hand, Fed’s Williams, who spoke yesterday, said that he believes there are coherent signs that the labour market is improving. At the end of March, Fed’s Pianalto also said she was encouraged by more robust job growth in recent months. I would regard a slowing in the pace of asset purchases to be a welcome direction for monetary policy if it resulted from a significant improvement in the outlook for labor market conditions, she said.

More insight was offered by Fed’s Raskin who commented that too much of the recent growth in employment was concentrated in low-wage and temporary jobs, leaving the recovery on shaky ground. She added that monetary policymakers are doing all they can to promote stronger economic growth and encourage hiring. Fed Chairman Bernanke was also recorded as saying that because of demographic trends, I doubt there will be an increase in labour force participation in the near term.

The Bureau of Labor Statistics’ Employment Situation survey is released 8:30 a.m. (EST) Friday 5 April 2013.