US Employment Report Preview (NFP, Unemployment Rate)

In this morning's Macro Update we suggested that the recent string of positive US data has seen analysts raise their full-year target for GDP, which is now up to 2.3 percent; 0.3 percentage points above our own as detailed in our Quarterly Outlook 1Q'12. One reason for the recent surge in optimism is because of the solid numbers from the labour market, which saw payrolls climb 1.64 million last year and 412,000 in 4Q'11.

Consensus for today's January report (13:30 GMT) is an increase of 140,000 down from December's 200,000, which understandable given that seaonal factors may have played a big part in that report's better than expected figure. We find ourselves near consensus with a target of 130,000 in nonfarm payrolls change and 8.5 percent for the unemployment rate - in line with consensus. We have collected a series of charts to illustrate just why we expect a deceleration in net additions of 70,000.

Initial Jobless Claims roughly unchanged since December
In the survey week in December first-time applications for jobless claims benefits had declined to 368,000 from 396,000 in the same week a month earlier. In January jobless claims stood at 355,000 in the survey week (though much higher at 402,000 and 379,000 in the surrounding weeks). Meanwhile, the 4-week moving average stood at 374,000 at the end of December and as of 27 January at 375,800, basically unchanged.
ADP and ISM point to solid private sector job growth
The slight miss by consensus on ADP Employment report (+170,000), which we covered here, points to robust private sector job growth. The ADP Employment report for December (+292,000) was tainted by a purge effect overstating the health of the private labour market and thus January's 170,000 gain is likely to better reflect the actual state of the labour market.The ISM Manufacturing points to robust growth in the manufacturing sector. While consensus looks for a gain of 13,000 down from 23,000 in December the Employment index of the ISM report was roughly unchanged at 54.3 vs. 54.8. The index, however, has vastly overstated the number of net new jobs in the manufacturing in the current recovery.
Government job losses to continue, but at slower rate
While the private sector looked reasonable robust in January government jobs have been continual headwind for overall nonfarm payrolls in this expansion, but it finally appears as if the number of net layoffs is starting to come down as state and locals have completed their budget cuts. The net change in government workers was only -12,000 in December and the 6-month moving average stands at -13,000 from -33,700 half a year ago.
ISM Non-manufacturing unknown before nonfarm payrolls, but details look promising: The ISM Non-manufacturing report (15:00 GMT) will be out 90 minutes after the Employment report and hence we lack its gauge of service sector employment. But the details of the December report look promising with new orders up and inventories down, and the employment index (at 49.8) has routinely underestimated service job growth of late. While 364,000 new service jobs were added in 4Q'11 the employment index averaged 50.8 indicating a mildly expansionary environment.
The US labour market is in a moderate expansion, which is only slowly getting more traction. Therefore we will not interpret a weaker January NFP print as evidence the labour market is slowing. Combining all of the above and other indicators, and acknowledging the likely shedding of a large number of holiday-related jobs, we look for a marked slowdown in the change in nonfarm payrolls to 130,000 in January from 200,000. However, we also feel that most of the risk to our forecast is to upside if private sector growth surprises.

Note that the Bureau of Labor Statistics will carry out its benchmark revision to the establishment survey (payrolls, hours worked, earnings), which is necessary to keep in mind when the numbers are released. The BLS writes "With the release of January 2012 data on February 3, 2012, the Current Employment Statistics (CES) survey will introduce revisions to nonfarm payroll employment, hours, and earnings data to reflect the annual benchmark adjustment for March 2011 and updated seasonal adjustment factors. Not seasonally adjusted data beginning with April 2010 and seasonally adjusted data beginning with January 2007 are subject to revision."