Employment Report Preview: Potential Rally Catalyst

The Employment Situation Report (ESR), corresponding to labor market activity during the month of September 2023, will be published by the BLS on Friday, Oct. 6, 2023, at 8:30 AM Eastern. This report makes available an extraordinary amount of important data derived from two separate surveys: The Establishment Survey and the Household Survey.

Data from the Establishment Survey includes Non-Farm Payroll Employment, Average Weekly Hours Average Hourly Earnings - with detailed breakdowns by industry group. Data from the Household Survey include data on the working age population, the labor force, the number of unemployed persons, the unemployment rate, various alternative measures of labor underutilization, and an exceptionally large variety of breakdowns of these data by categories such as industry, class of worker, race, sex, age and many others.

In this article, we will provide a preview to Friday’s ESR, focusing on the recent evolution of the most widely followed indicators. This article also will discuss recently released information that may provide clues about what changes and/or surprises might possibly be in store for this month's report.

Summary Overview

In Figure 1 we show a summary overview of the recent evolution of some of the most important data points that will be published in the Employment Situation Report. The table reports annualized growth rates for the most recently available 1-month, 3-month, 6-month and 12-month periods.

Figure 1: Annualized Growth Rates of Key Data

As we can see from the table above, despite headwinds from rising interest rates, conditions in the US labor market have remained quite resilient. Through August 2023, most key metrics of labor market strength ranked at or above historical medians.

Non-Farm Payroll Growth

In this section, we focus on the growth in non-farm payroll employment, which is typically the most highly anticipated statistic in the Employment situation report. Figure 2 shows the recent evolution of the Month-on-Month (MoM) growth rate of non-farm payrolls.

Figure 2: Growth in Non-farm Payrolls

In our review of the data that will be published tomorrow, we will provide a detailed breakdown of how much each industry contributed to the overall change and acceleration in non-farm payroll employment.

What might we expect from the Non-Farm Payrolls data on Friday? The most direct clue comes from this past Wednesday’s ADP report, which registered a sharp decline in payroll growth. This suggests that we could see some significant deceleration in the BLS’s official measure of non-farm payrolls growth. By contrast, JOLTs data for August suggested an uptick in labor demand that could have boosted hiring in September.

The median forecast for the Non-Farm Payrolls is anticipating growth to slow from 187,000 (0.12%) to 170,000 (0.11%), representing a deceleration of -0.01%.

Average Hourly Earnings

Markets pay close attention to the growth rate in Average Hourly Earnings (AHE), as this is an important indicator of key economic trends such as personal income, consumer spending and inflation. However, readers should be aware that because of the way it's calculated, MoM AHE data is subject to significant distortions due to statistical effects (i.e. compositional and base effects). In Figure 3 we show the recent evolution of average hourly earnings.

Figure 3: Growth in Average Hourly Earnings

What, if any, sort of changes might we expect from the AHE? Detailed data from both Indeed and ADP suggest the continuation of a multi-month trend of a gradual but steady decrease in wages – albeit still at rates that are uncomfortably high for the Fed given their 2.0% inflation target.

The median forecast is anticipating MoM growth of 0.3% compared to the previous month’s 0.2%, an acceleration of 0.1%. The 0.3% growth is consistent with estimates from Indeed and ADP. The MoM acceleration that is expected in the BLS data is mainly an artifact of more or less random statistical MoM volatility and merely represents reversion of the growth rate to its trend.

Unemployment Rate

The BLS publishes several measures of labor under-utilization derived from its Household Survey. The most widely anticipated of these measures is the Unemployment Rate. It's important to understand that changes in the unemployment rate are attributable to three main factors: Changes in the working age population, changes in labor force participation rate of the working age population and changes in the number of unemployed persons. We will provide a breakdown of these contributing factors in our review of the unemployment rate data that will be published tomorrow.

In Figure 4 we show the recent evolution of the unemployment rate.

Figure 4: Trends in the Unemployment Rate

What should we expect from Friday’s unemployment rate data? There are several indicators that might provide some hints. First, the Department of Labor’s estimate of the Insured Unemployment Rate held steady during the last month, suggesting that the overall unemployment rate that's estimated by the BLS may also hold steady. Second, initial claims for unemployment insurance are at a very low level, trending even lower during September, suggesting some downward pressure on the unemployment rate. Third, continuing claims trended down very slightly during September – again suggesting some downward pressure on the overall unemployment rate. Fourth, the Challenger Job Cut Report indicated a drop in layoff announcements relative to the prior month – albeit at levels still much higher than 2022. On the margin, the level of announced layoffs (particularly in August) suggests some potential modest upward pressure on the unemployment rate for September.

The median forecast is anticipating an unemployment rate of 3.7% vs. 3.8% the previous month. This forecasted uptick in the unemployment rate is probably mostly a function of expected “statistical payback,” compensating from last month’s relatively large rise in the unemployment rate, which came mostly from the reported increase in the volatile participation rate.

Concluding Thoughts: Potential Impacts Of Employment Data on Financial Markets

The US labor market has been extraordinarily strong during the past year and has remained remarkably resilient in recent months. The unemployment rate is near record lows. Non-farm payroll growth has stayed at or above-trend. Furthermore, wages have been growing at a rate that is uncomfortable for the Fed, given its 2.0% inflation target.

In this macroeconomic context, US Treasury bond yields have been rising sharply. This, in turn, has placed downward pressure on many asset classes, including US equities.

Going into this report, both fixed income and equity markets are significantly oversold on a short and intermediate-term basis. If Friday’s Employment situation report were to show that overall labor market conditions have materially weakened, this could spark a meaningful rally in the prices of bonds and common stocks.

Although the ADP report suggests the possibility of a downside surprise in non-farm payrolls, most leading indicators suggest that overall labor market conditions remained strong and mostly unchanged from last month.

We will be providing detailed coverage of the Employment Situation Report shortly after its publication at 8:30 a.m.

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