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Payrolls Preview: What To Look For In Friday's Jobs Report

Sep. 01, 2021 2:18 PM ET2 Comments
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  • The consensus is looking for a gain of about 740,000 jobs on Friday, which would mark an increase in total payrolls growth.
  • A headline jobs reading below 620,000 would mark a sequential decline in payrolls growth on a smoothed six-month annualized basis.
  • Also, look at the labor force participation rate, the employment to population ratio, and the growth rate of cyclical vs. non-cyclical payrolls.

Payrolls Preview: What To Look For In Friday's Jobs Report

On Friday, the Bureau of Labor Statistics "BLS" will publish the Employment Situation report for the month of August. 

The upcoming jobs report takes on additional significance because it is the last labor market update that the Federal Reserve will see before announcing their plans to reduce the pace of asset purchases at their September meeting. 

Wall Street consensus widely believes the FOMC will announce a taper plan in September, most likely to begin in November unless the Friday labor report wildly misses expectations. 

In his Jackson Hole speech, chairman Powell noted that the 3-month average in job gains had been about 830,000, and continued progress would be a green light to begin tapering the pace of asset purchases. 

Jerome Powell Comment on Labor Market

Source: Federal Reserve

The criteria for rake hikes as opposed to a balance sheet taper are far more stringent and a discussion for 2022. 

Wall Street is expecting August to bring roughly 740,000 net jobs, more than enough to keep the FOMC on track to announce a taper in September (despite the cyclical slowdown in growth). 

Investors that are familiar with the economic process at EPB Macro Research know that the direction of growth is the most important factor, far more critical than a "beat" or "miss" relative to expectations. 

The trending direction of economic growth, of which the labor market is an important component, drives asset price performance. 

Real economic growth is already declining in the economy as industrial production growth and real consumption growth have cooled notably since May. 

Employment growth hasn't started a downtrend like the other coincident data points, partly because labor is more lagging than other coincident metrics like production. 

If the headline job figure comes in at 740,000, that will represent a sequential increase in the rate of total payrolls growth when measured on a smoothed six-month annualized growth rate. 

Total Payrolls: Consensus Estimate Impact on Growth

Source: BLS, EPB Macro Research

The smoothed six-month annualized growth rate is superior to a year-over-year calculation, particularly when the base effect has a large impact. 

Any jobs reading above 620,000 will bring a sequential increase in payrolls growth. If the headline payrolls reading surprises below 620,000, then total payrolls growth will decline sequentially and join the other coincident indicators in highlighting a broad-based economic slowdown. 

Manufacturing payrolls are expected to rise 30,000, which keeps manufacturing payrolls growth roughly flat. Below 30,000 and manufacturing payrolls will mark four consecutive declines in growth. 

Manufacturing Payrolls: Consensus Estimate Impact on Growth

Source: BLS, EPB Macro Research

In addition to total employment growth, breaking out the growth rate of "cyclical" employment growth, namely construction + manufacturing, is highly revealing. 

In the last employment report, cyclical employment growth declined while non-cyclical employment growth such as local government doubled. 

Cyclical Vs. Government Employment: Growth Rate

Source: BLS, YCharts, EPB Macro Research

The employment-population ratio or the labor force participation rate are far superior metrics to the U-3 unemployment rate. 

Focus on these broad, secular labor metrics over the U-3 unemployment rate. 

Employment-Population Ratio:

Source: BLS, FRED

The growth rate of industrial production, real consumption, and real income have declined notably over the last 3-5 months. 

Coincident Growth:

Source: BLS, BEA, Federal Reserve, EPB Macro Research

Employment, while more lagging, remains the strongest of the four main coincident growth metrics. 

On Friday, focus on the direction of total payrolls growth and the difference between cyclical payrolls growth and non-cyclical payrolls growth. 

A jobs reading over 620,000 keeps the positive momentum in the labor market, but the cyclical vs. non-cyclical breakdown is important as construction and manufacturing payrolls growth has already been close to cut in half. 

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