“The people, who are trying to make this world worse... are not taking a day off. How can I? Light up the darkness.”
-Bob Marley
If you’re new to this whole Macroeconomics thing, we can be an insular, egoistic bunch. We even have our own little Golden Rule:
The one with the Gold gets to make all the Rules.
Its cutesy and clever as Macro mantra’s go but its utility is largely confined to contractionary and/or inflationary phases.
We remixed it @Hedgeye for more universal applicability. Let’s call it Growth Rules:
Get growth right and get most of your big Macro allocations right.
And, of course, nothing says growth quite like the sweet smell of a positive 2nd derivative trend in payrolls on a sunny Friday morning in June.
So pour an extra cup of the Blue Mountain roast, break out that fish net tank top and awaken your inner Jamaican because every ting be aiight mon.
Back to the Domestic Labor Grind…
Consensus says 180K on the headline. Would you take the under? Does it matter?
Being contrarian can be cool but everyone knows that your favorite contrarian’s favorite contrarian didn’t earn that rep via promiscuous perma-contrarianism. And besides, if you’re known as a contrarian wouldn’t it be kind of contrarian of you to go full consensus?
Anyway we don’t do precision, point estimate guesses on the headline NFP. We are, however, stalkers of asymmetric risk.
Here’s your asymmetry for May:
- The May NFP comp is the easiest of the present mini-cycle at +43K (last May). In other words, we only need to print +44K this morning to get an acceleration in year-over-year payroll growth.
- ADP printed +253K for May. We all know ADP isn’t a great predictor of NFP but it is directionally accurate ~2/3rds of the time. It also probably doesn’t matter….
- The largest absolute, post-recession delta between the ADP payroll estimate and NFP is 176K. So in other, other words, even if NFP misses ADP to the downside by the widest margin in 7 years, non-farm payroll growth will still accelerate on a Y/Y basis.
Need more asymmetry fodder:
- ISM manufacturing employment rose in May and the balance of the Fed Regional Surveys were flat to up across the Employment subindices
- Initial Claims printed 233K during the May employment survey week, the lowest level in decades. So, the separations side of the employment equation is as supportive of net hiring as it’s ever been.
- As can be seen in the Chart of the Day below, from a cycle perspective, Initial Jobless Claims have been the most consistent, lead labor market indicator for the economic cycle. While total employment peaks coincident to the end of the cycle (which, of course, is not surprising – how do you think economists retrospectively pick when the cycle peaked/recession started?), peak improvement in initial claims occurs ~7 months ahead of the economic cycle peak. As it stands, we’re still putting in the trough in Initial Claims.
What about that +71% Y/Y spike in Job Cut Announcements yesterday from Challenger?
- It is notable as the trend in job cuts tracks the larger economic cycle but the series is volatile on a growth basis from month to month and the latest month was juiced singularly by the Announced Layoffs at Ford.
- Bear in mind the magnitude. Total Announced Job Cuts are only 33K and have been trending lower. That total is also relative to an initial claims base of ~1MM and total monthly separations (quits, layoffs, discharges, etc) of ~5MM. Bounded oscillations in Job Cut announcements are largely noise.
In short, being a bearish contrarian on May employment isn’t a high probability bet. I could always be wrong but swinging at high outside pitches does not a durable (hall of fame) career make.
And remember the simple reason why the payroll rate-of-change matters.
- Assuming a flat trend in weekly hours (which has been the trend), an acceleration in the growth in number of people working drives an acceleration in aggregate hours growth and …
- If hourly earnings for those workers are flat to up (the May Comp for hourly earnings growth is actually pretty easy at +2.5% Y/Y) ….
If hours worked are accelerating and earnings per each one of those hours are flat-to-accelerating then aggregate income growth will be accelerating and the baseline expectation for consumption, by extension, has to be ‘stable-to-better’. And all the income and consumption based indicators that come out later in the month are likely to be relatively solid.
I’ve contended for a while now that given the present surreality of things, you could probably get elected on a simple platform of adding another 1 or 2 national holidays a year. No one would cop to it in an exit interview but I’d bet it’d show up in the results.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.18-2.33%
SPX 2
NASDAQ 6107-6270
VIX 9.13-11.77
EUR/USD 1.09-1.12
Oil (WTI) 46.60-49.30
Gold 1
Copper 2.50-2.60
I hereby nominate today as National Labor Asymmetry Day. Rum and “dutchies” on the house.
Christian B. Drake
U.S. Macro analyst
