Analysts at Nomura offered their review of the US data from overnight and a preview of the nonfarm payrolls.
Key Quotes:
“ADP private employment: ADP reported a 163k gain in private employment during August, below expectations (Nomura: 210k, Consensus: 200k), as service-sector employment growth slowed somewhat during the month, adding only 139k to the topline numbers. Goods-producing industries showed another strong month with a 24k contribution. The slight slowdown was somewhat broad-based across service industries. However, part of our above-consensus forecast for tomorrow’s NFP report is based on expected payback from certain industries that showed unusual softness in the July BLS report. This idiosyncratic softness did not show up in the July ADP report, indicating that some discrepancy between ADP and BLS numbers may persist into August (ADP reported a 217k gain in private employment during July versus the BLS print of 170k).
Initial jobless claims: Initial jobless claims declined 10k to 203k for the week ending 1 September, another solid reading, reaching the lowest level since 1969. Continuing claims declined marginally by 1k to 1707k for the week ending 25 August. Low levels of initial claims are consistent with steady labor market strength. However, a pickup in hurricane activity this year could add some volatility to readings over the near term.
Productivity, Q2 final: The second estimate of Q2 labor productivity came in unrevised at 2.9% q-o-q saar despite a modest upward revision to Q2 GDP growth in the BEA report last week. Output growth was revised up by 0.2pp to 5.0%, but the revision was not enough to raise labor productivity (real output per hour) as aggregate working hours growth was revised up slightly by 0.1pp to 2.0%. Unit labor costs were down 1.0% q-o-q saar in Q2, with 9.7% q-o-q saar increase in unit non-labor costs. The labor productivity growth remains subdued on a y-o-y basis, with Q2 pace at 1.3% y-o-y up from 1.0% in Q1. The pick-up in labor productivity growth in Q2 would likely be unsustainable. Unit labor cost, an indicator of wage inflation pressure, remained steady at 1.9% y-o-y.
ISM non-manufacturing index: The ISM non-manufacturing index rebounded to 58.5 in August, above expectations (Nomura: 56.0, Consensus: 56.8), from 55.7 in July. The report overall indicates healthy expansion in non-manufacturing activity in the month. The business activity index increased 4.2pp to 60.7 and the new orders index rose 3.4pp to 60.4. Almost all non-manufacturing industries reported growth in August, with the agriculture and forestry industry being the only exception. The prices paid index remained elevated at 62.8. Construction and mining industries appeared to be concerned over tariff-related cost increases. The retail trade sector indicated solid activity with relatively modest concerns over trade tensions. Healthy readings and anecdotal evidence from this report appear consistent with strong domestic demand and suggest a healthy gain in August retail sales. In addition, the employment measure improved slightly to 56.7 from 56.1, pointing to healthy hiring activity in August. Taken together with yesterday’s ISM manufacturing report, which also surprised to the upside, business activity in August appears to have continued to grow a strong pace in light of healthy domestic demand despite elevated trade tensions.
GDP tracking update: The July factory orders report revised up new orders and shipments of ex-aircraft nondefense capital goods in July and June. These revisions suggest stronger business equipment investment in Q2 and Q3. Moreover, durable and nondurable goods inventories held by manufacturers were revised up for July and June. Revisions to inventories suggest less inventory drawdown in Q2, which implies less contribution from real changes in inventories to real GDP growth in Q3. Altogether, after rounding, we raised Q2 real GDP tracking estimate by 0.1pp to 4.5% q-o-q saar, and our Q3 real GDP tracking estimate remains unchanged at 3.1% q-o-q saar.
Preview
Employment report: We expect a strong nonfarm payroll employment increase of 220k in August, partly driven by a reversal of idiosyncratic softness in certain industries in July. Employment indicators during August remained in firm territory with low initial jobless claims and healthy business survey employment indices. With a modest downward bias from calendar effects, we expect average hourly earnings (AHE) to increase 0.18% m-om, corresponding to 2.69% on a 12-month basis. Finally, in light of sustained employment growth above the level needed to absorb new labor market entrants, we expect the unemployment rate to fall further to 3.8% and see some risk of a sub-3.8% reading. Read our full preview: August Employment Preview, 6 September 2018.”
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