US nonfarm payroll employment to increase by 350k in October - Nomura

Analysts at Nomura suggest that the US October NFP report is likely to reaffirm continued labor market strength, albeit with wage growth that remains lackluster by historical standards.

Key Quotes

“We expect nonfarm payroll employment to increase by 350k in October, fully reversing September’s weather related decline and keeping the underlying pace of job growth close to 160k. After increasing strongly in September with strong upward revisions, we forecast growth in average hourly earnings (AHE) to rise only modestly by 0.1% (0.14%) m-o-m, bringing the y-o-y rate down slightly to 2.7% from 2.9%. While there is a risk that the unemployment rate will move up marginally to a rounded 4.3%, we expect continued job growth to keep the unemployment rate unchanged at 4.2% on a rounded basis.”

“We forecast a 350k increase in nonfarm payroll employment (NFP) in October; combined with the hurricane-related drop of 33k in September, we expect NFP to increase 158k on average over the past two months, near the 153k average change during the six months before September. Consistent with our view that payroll growth remains robust, today’s ADP employment report showed an increase of 235k in private payrolls and an average of 172k over the past two months. The ADP numbers, positive economic sentiment, and economic data exceeding expectations suggest some upside risk to our October NFP forecast.” 

“Reflecting continued strength in the manufacturing sector, we expect an increase of 30k in manufacturing employment. Regional manufacturing surveys have shown continued momentum heading into Q4 and industrial output has remained strong. Both the Philly Fed and Empire survey employee subindices increased notably during the month.”

“Of greater interest in the October report will be average hourly earnings (AHE). AHE increased 0.5% (0.45%) in September, partly driven by hurricane-related distortions and a calendar quirk. However, unrelated to inclement weather, upward revisions to August helped boost y-o-y AHE growth up to 2.9% after unexpected softness from earlier this year. However, we expect AHE to increase only modestly by 0.1% (0.14%) in October. This would bring y-o-y AHE growth back down to 2.7%, and back down to 3% on a three month annualized percent change basis.”

“Wage growth by a variety of measures has come in below what some expected, especially given the fall in the unemployment rate. To illustrate that point, Figure 4 shows how the unemployment rate and various measures of wage growth have evolved since immediately before the recession. The main takeaway is that while the unemployment rate has recovered to pre-recession levels, wage growth by three different measures (AHE, ECI, and the Atlanta Fed Wage Tracker) remains 0.5-1pp below the levels seen in 2007. Further, wage growth by all three measures witnessed some plateauing over the past year. Two reasons for the lackluster wage growth include a less dynamic US labor market and higher unemployment after controlling for demographics.”