US Non-Farm Payrolls Preview


US Non-Farm Payrolls: 13:30 BST, Friday 5 July 2013


US non-farm payrolls rose 175,000 in May, beating expectations of 163,000. The unemployment rate edged higher to 7.6%, from 7.5% in April.

The payroll data was initially taken as a positive sign that growth in the economy is creating jobs at a reasonable rate (172,000 is the 12 month average). However, the better than expected figure encouraged talk about whether the Fed would begin tapering its asset purchase programme sooner rather than later. These concerns were somewhat tempered by the uptick in the unemployment rate – a measure used by FOMC members as a benchmark for adjusting Fed policy.

Chris Williamson, chief economist at Markit, noted in reaction to last month’s date release: “As the labour market often lags behind changes in output, the case for scaling back policy stimulus is by no means clear cut.”

Williamson added, “The Fed is likely to watch the incoming data flow on business activity and demand closely over the coming months before making clear signals on policy changes, and will probably want to see the actual rate of unemployment come down further before being comfortable that a meaningful and sustainable recovery is in place.”


The consensus forecast for total non-farm payrolls is an increase of 165,000 jobs in June, according to a Reuters survey. The median estimate for the rate of unemployment is 7.5%, according to the same survey.

Economists at HSBC believe “most labour market indicators point to ongoing employment growth at a moderate pace,” and highlight two areas of interest specifically: first, “construction employment appears to be trending higher, but monthly growth was weaker this past spring than during the winter”; and second, “government employment continues to decline in response to budgetary cutbacks”.

HSBC’s total payrolls estimate is below consensus at 155,000. Their economists expect “+16,000 from construction, +1,000 from manufacturing, +143,000 from private services industries, and -6,000 from government payrolls”.

On the participation rate, HSBC note, “The labour force participation rate has been on a downward trend for several years, but has shown some tentative signs of stabilisation in recent months.”

Jim Reid, an economist at Deutsche Bank, draws attention to the fact that “summer payroll numbers have on average been weaker than at other times of the year,” and notes that a couple of labour indicators have led to increased expectations of a softer payrolls report this month.

Mike McCudden, head of derivatives at Interactive Investor, adds, “Certainly recent numbers have been a little less upbeat and there’s a belief building that what had seemed imminent tapering, whilst still inevitable has perhaps been kicked a little further down the road.”

Here’s a look at some of the other labour metrics released in the last month:


The US private sector added 188,000 jobs from May to June, exceeding expectations of 160,000, according to the ADP National Employment Report.

The increase was “driven by gains across all sizes of businesses, and with small companies showing the largest overall monthly increase. Most notably, the goods-producing sector added 27,000 jobs in June, a marked improvement over the decline the previous month,” said Carlos A. Rodriguez, president and CEO of ADP.

The correlation between ADP and the Bureau of Labor Statistics’ monthly survey is hotly contested, but Deutsche Bank’s US economists believe the ADP report is “the single best predictor of monthly changes in payrolls”. They add, “Over the last 12 months, the average error between the difference in private payrolls and ADP has been -14k, which is quite small since the standard error on private payrolls is about 75k per month.”

ISM Manufacturing

Economic activity in the manufacturing sector expanded in June, according to ISM; the index registered 50.9%, an increase of 1.9 percentage points from May.

But, the employment component registered just 48.7% in June, the first sub-50 reading (indicating contraction) since September 2009. Reid commented, “In the week of payrolls that’s clearly sending out hopes of a softer report and hope of a tapering delay.”

Paul Dales, an economist at Capital Economics, also weighed in: “On the face of it, that’s consistent with declines in manufacturing payrolls of over 50,000 a month.” But, he added, “Since this survey has been too pessimistic relative to payrolls for most of the last year, we are sticking to our payrolls forecast of a 150,000 rise in June” – an estimate that is nevertheless below the 165,000 consensus.

ISM Non-Manufacturing

Economic activity in the non-manufacturing sector also expanded in June – but at a slower pace –, according to ISM; the index registered 52.2%. June’s reading reflects the lowest ISM Non-Manufacturing reading since February 2010.

But employment was a bright spot; the sub-component climbed to 54.7%, a four-month high.

Initial Jobless Claims

Initial jobless claims fell again in the latest week (ending June 29) to 343,000, a decrease of 5,000 from the previous week’s revised figure of 348,000. The 4-week moving average now sits at 345,500.

“A downward drift in initial claims for unemployment insurance suggests that labour market fundamentals have improved somewhat, but the change has probably not been strong enough to pull job growth out of its recent range,” said Michael Moran, economist at Daiwa Capital Markets America.


Friday’s non-farm payrolls data could provide the market with an indication as to when the Fed will begin tapering its asset purchase programme. The Fed has placed more emphasis on labour market metrics of late, and the small payrolls increase on last month’s data predicted could compound fears that Fed tapering is imminent.

Here are some economists’ views on the relationship between non-farm payrolls and the Fed’s monetary policy decision-making:

Victoria Clarke - Investec Securities - “Since the 19 June Fed meeting … fears of a Fed exit have notched up, spreading to expectations of a quicker ‘normalisation’ in rates. Given those enhanced fears, next week’s jobs report will once again shape concerns over how quickly and aggressively the Fed tightens policy.”

Paul Dales - Capital Economics - “The Fed is still mostly focused on labour market developments, so the release of June’s non-farm payroll and unemployment figures this Friday could have an even bigger than normal impact on financial markets. We anticipate a 150,000 increase in payrolls. That would be smaller than May’s 175,000 gain and would presumably generate some sort of rally in the bond market.”

Chris Williamson - Markit - “Last month’s better than expected non-farm payroll data added to global financial market jitters that Fed tapering was growing increasingly imminent. The Fed’s strategy to start tapering its $85bn per month asset purchases by the end of the year is dependent on the unemployment rate falling from its current 7.6% to 7.0%. A rate of 6.5% would represent the threshold for rates to start rising.”

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