Non-Farm Payrolls Preview: Softening data expected

After a strong rebound in the third quarter and an October reading of 638k which beat expectations, we are due to get a snapshot of the damage from the second wave of the pandemic in the US. Despite the positive vaccine news released during November that has fueled record highs in stocks, it is the new lockdowns across the country that are keeping job gains in check and may cause them to even slow more than anticipated in the next few months. The smaller gains in job growth also mean that the unemployment rate is only forecast to edge lower, by just 0.1% to 6.8%.

Business investment remains modest and consumer spending growth has slowed sharply as states are having to respond because new cases are increasing dramatically. Although housing does remain very robust, it is not strong enough to fully compensate for the general weakness in other parts of the economy.

Buckling labour market

Since the economy lost around 22 million jobs across March and April, roughly 12 million jobs have been regained and created or 6.6% of February’s total employment. The unemployment rate is actually based on the more volatile household survey which paints a slightly better picture with over 16 million jobs being created, after losing 25 million at the start of the pandemic.

Lately and with fading fiscal support, the more frequent initial jobless numbers have seen the first consecutive weekly rise since July, as claims rose to 778k last week. Indeed, the pace of progress towards lowering initial jobless claims has stalled with only roughly a 50k drop between the October and November payroll reference periods. This may be due to the rising impact of the tightening restrictive measures or that Census workers are going back on claims as an offset to improving conditions elsewhere.

Near-term concerns

The employment gauges of the ISM figures released Tuesday and the usual forerunner, the ADP payrolls may give us a taster for nonfarm expectations. Inevitably with more restrictive measures in place, there are particular worries about jobs growth slowing again in the hospitality industry such as the leisure and restaurant sectors. Consumer surveys have consistently pointed to dwindling numbers of the population venturing out to these establishments.

With authorities responding to the new case count rise, a further deceleration in job growth will persist in December and likely early 2021. If the downward trend in the unemployment rate also peters out, the risk is then that wage growth will be impaired for an extended period.

Vaccine hopes in Spring

If the market forecasts the softening in jobs data, it also expects fiscal aid to arrive once President-elect Biden is sworn in towards the end of January. That gap between the winter deterioration of the labour market and more fiscal support will be critical. Of course, the worse the numbers are, the more likely we are to see the Fed take action at its meeting on16 December. But, if payroll growth can remain positive, then a post-vaccine ‘bump’ might also give markets a further spring in their step.