Overnight the ADP national employment report, a private sector survey on US jobs growth, rose by a stronger-than-expected 257,000 in December.
The figure crushed expectations for an increase of 192,000, firming up expectations that this Friday’s US nonfarm payrolls report will reveal yet another hefty increase in hiring.
While that’s the market consensus, not everyone believes another 200,000 plus increase will be recorded come Saturday at 12.30am AEDT.
According to Joseph LaVorgna, Brett Ryan and Aditya Bhave, Deutsche Bank’s US economic team, one often overlooked indicator suggests that job growth will miss to the downside, not topside, in December.
In December, domestic auto and light truck sales registered a 13.5 million SAAR. This compared to a consensus forecast of a 14.1 million SAAR. The resulting 0.6 million undershoot is large. In fact, it represents a one-standard deviation error. Since November 2003, which is when our data set begins, there have been 15 occasions when domestic vehicle sales have been at least one standard deviation below the consensus estimate. In 12 out of those 15 instances, nonfarm payrolls were below the consensus forecast, missing by 62k on average. If we add the three times when nonfarm payrolls surprised to the upside (the average was +43k), the overall average miss reduces to -41k.
In light of the historic relationship between auto sales and payrolls growth, LaVorgna, Ryan and Bhave have lowered their expectations for US payrolls growth in December, forecasting an increase of 160,000 from their previous estimate of 200,000.
Current consensus is for an increase of 200,000, although, after the strong ADP report overnight, Deutsche believe that “the consensus is actually anticipating a December nonfarm payroll number that is well above 200,000”.
They also note that “the Fed will not be troubled by a 160,000 gain in December payrolls because this is still fast enough in policymakers view to put further downward pressure on the unemployment rate and hence eventually push inflation higher”.