The Complete "Distorted Jobs Report" Preview

What the sell-side expects:



  • JP Morgan 75K

  • Goldman Sachs 100K

  • UBS 100K

  • Bank of America 110K

  • HSBC 120K

  • Barclays 125K

  • Citigroup 130K

  • Deutsche Bank 130K


What the market expects vis RanSquawk:


Today sees the release of the US nonfarm payrolls and unemployment rate reading for the month of October, during much of which, hundreds of thousands of federal workers were furloughed due to the recent sixteen day government shutdown.


Ahead of the release, it is important to note that those furloughed federal workers are still counted as employed for the purpose of the headline nonfarm payroll reading, given that they received back-pay. However, the unemployment rate is calculated using a survey of households, in which those workers are categorized as unemployed. It is also possible that there may be confusion among furloughed workers over their own employment statuses, which could distort the unemployment figure.


As well as the shutdown’s effect on the collection of data, the Congressional dysfunction is also likely to have dampened investor sentiment during the month of October. This may have had a negative impact on the labour market, and thus affect the payrolls reading.


In terms of other data points, this year’s trend of nonfarm payroll readings has followed a downward path. The delayed September reading, released just two weeks ago, was no different, coming in at 148k versus an expected 180k and last week’s ADP employment change reading followed suit at 130k versus an expected 150k. Yesterday’s expectation-beating third-quarter GDP reading (2.8% vs. Exp. 2.0% Prev. 2.5%) will have been of a too wide date range to account for the shutdown.


 


And then, here is Bank of America why today's report will be largely meaningless.


The government shutdown means a relatively complicated, soft employment report. We look for a payroll employment gain of just 110,000 for both total and private employment. We also expect a sharp, one-time jump in the unemployment rate to 7.4% in October from 7.2% in September, although it could be higher. An increase in October is likely to disappear in the November report.


This report will be distorted in several ways. First, the establishment and household surveys have different ways of classifying workers. In the establishment report, employees are counted as on payroll if they receive pay during the survey week. Furloughed government workers were awarded back-pay during the shutdown, satisfying this definition of employed. Conversely, the household survey classifies furloughed workers as on "temporary layoff," which means they are recorded as unemployed. Note that the same would be true for a private sector paid furlough. The upshot, however, is that the same federal government employee would be both employed in the establishment survey and unemployed in the household survey. Those exact numbers are unclear, but the jump in unemployment could be anywhere from 250,000 (a 7.4% unemployment rate) to 500,000 (a 7.6% unemployment rate).


The unemployment numbers could be distorted for another reason: data collection began one week later than intended (October 20 instead of 13), but households are asked to report on their employment situation from the original survey week. The BLS has highlighted that "non-sampling error" - basically, people answering the survey incorrectly - could be much higher this month. That would be in additional to the usual sampling error that comes from taking a survey in the first place. According to the BLS, that error is typically plus or minus 90,000 for the monthly change in payroll employment, and plus or minus 0.2% for the unemployment rate. All told, we have much less confidence in these numbers than usual. 


These data challenges also complicate other aspects of the report. The BLS has noted that federal employees who worked fewer than 35 hours during the survey week may be counted as part-time for economic reasons, even though their positions remain full time. On the other hand, the establishment survey estimate of average weekly hours is based only on the private sector. While we see some downside risk to private hours during the shutdown and its aftermath, we expect those to remain steady at 34.5 hours. Similarly, we look for average hourly earnings to grow 0.2% in October, faster than the 0.1% increase in September but in line with the average over the past six months. We won't know until we see the November employment data whether these various distortions are one-off effects or whether the fiscal drama in October had more persistent effects.

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