We’ve made no secret about our position on the US labour market. The internals have looked promising for some time. Now, after this morning’s ADP report, analysts are scrambling to revise their estimates. Even still, the median estimate is 105k (up from 85k before today).
Let’s walk through some analysis.
Personal Current Taxes are up 15.2% y/y while payrolls are only up 0.7% y/y. Another compelling point about this data series: a peak in income tax collection around the mid-point of a business cycle can be bullish for future payrolls. As we theorised in our piece in analysing employment, backlogs & output re-configuration, more specialised (higher paid) workers are early hires in the business cycle. They reconfigure economic output, and once demand and sales drive more production, less specialised (lower paid) workers are hired. This transition seems to be happening.
Both ISM Manufacturing & Non-Manufacturing employment sub-indices are highly correlated with monthly payroll releases. Manufacturing implies +400k. Clearly this isn’t happening, but the ADP report (and previous employment reports from both ADP & the BLS) confirm a strong manufacturing recovery.
The non-manufacturing report seems to imply a weaker number than than the manufacturing report, but still likely stronger than the 105k forecasted tomorrow.
Our linear model takes these three as inputs. It’s done a decent job in the past:
The forecast for tomorrow is +189k, +/- 51k. This number is all-in: headline plus previous month revisions. Even the most pessimistic end of that range (+138k) is substantially above consensus.
Our view is that consensus views on the economy have been driven down by soft transitory data, and that expectations for payroll growth tomorrow are overly pessimistic.