US NFP: Look for job growth to have settled back a bit in August - RBS

Research Team at RBS, suggests that in the wake of Jackson Hole, there is little doubt that the timing of Fed action will be determined by the data.

Key Quotes

“According to the minutes from the July FOMC meeting, some participants (including Yellen, presumably) preferred to delay action until they were confident inflation was moving closer to 2% “on a sustained basis” and until the data gave them greater confidence that economic growth was “strong enough to withstand a possible downward shock to demand.” The August employment data, while healthy, may fall short of that criteria on both fronts. First, following hefty increases in each of the prior two months, we look for job growth to have settled back a bit in August, with overall payrolls forecast to have advanced by 175,000 (private payrolls may have risen by 165,000).

Looking through the month-to-month volatility, the trend (12-month moving average) in payroll growth has decelerated from over 250,000 in early 2015 and 230,000 in early 2016 to around 200,000 currently. Such a cooling is not uncommon late in the economic cycle. Moreover, the current pace is still more than sufficient to offset the growth in the labor force, keeping downward pressure on the unemployment rate. However, the deceleration does suggest less upside momentum which, all else equal, might make the economy more vulnerable to a negative external shock.

On the inflation front, the news in the employment report may also make the case for near-term action look less compelling, since average hourly earnings in August are likely to have been biased lower by the calendar quirk (the reference week for the payroll survey ended on Saturday, August 13th; since the 15th of the month falls after the survey period, increases in bi-monthly pay are less likely to have been captured, skewing the result lower). In August, we expect average hourly earnings to have been flat, compared to an abovetrend increase of 0.4% recorded in August 2015. Thus, on a year/year basis, the growth in average hourly earnings may have slid from 2.6% in July to perhaps 2.3%. Optically, this puts less pressure on the Fed to hike this month.

Away from payrolls and earnings, we look for the average workweek to have held steady (after extending in July). Combined with a more moderate private payroll advance, this would imply a rise in the index of aggregate hours worked of just 0.1% following a hefty 0.5% rise in July – another sign of some moderation in the expansion pace. Finally, we look for the unemployment rate in August to have remained steady at 4.9% for a third straight month. On balance, then, while the August employment report may be healthy enough to keep the door open for rate hikes later this year, the results may not be strong enough to compel this risk-adverse Fed to act in September.

Factory orders could have posted their first gain in three months in July, perhaps having risen by as much as 2.1%. Orders for durable goods rebounded in the month led by sharp increases in bookings for defense goods (+16%) and civilian aircrafts (+90%). Orders for durables goods excluding these two volatile categories also jumped up by 1.6%, clocking in the largest monthly gain since January. In contrast, orders for nondurable goods could have slipped slightly last month, perhaps by 0.2%. We expect this decline to have been concentrated in petroleum bookings, as oil prices toppled in July. Excluding petroleum, nondurables could have registered a slight increase in July.”