US non-farm payrolls, arguably the most important economic report around the world each and every month, will be released later today.
However, rather than the level of payrolls growth or movement in the US unemployment rate, the most important part of the July release will be average hourly earnings, says Andrew Labelle and Andrew Hollenhort, economists at Citibank.
“Soft inflation and solid economic growth mean that wages, not payrolls, remain the focus of the July jobs report,” the pair wrote in a note previewing the payrolls release.
“We anticipate average hourly earnings (AHE) to increase on-consensus 0.3% month-on-month and 2.4% year-on-year (YoY), but see risks as tilted slightly to the upside for the YoY number, as the surprisingly soft June AHE print may be revised up.”
This chart from Citi shows the annual growth in average hourly earnings and employee costs since the great recession.
The reason why Labelle and Hollenhort believe that the annual earnings figure may surprise to the upside is based around the weak result reported in June when monthly earnings increased by just 0.2%.
“Since 2016, of the five times where we had errors as large as in June 2017 in our regression equation, four of these were revised in the direction of our initial forecast, although in only two of five instances did this occur in the following month,” they wrote.
So when the monthly growth rate tends to miss to the downside, it has a tendency to be revised higher at a later date.
While we’re only talking about the risk of a tiny upward revision, with so much attention on wage and inflation pressures in the US, and with so many investors positioned for continued weakness, a small upside surprise to earnings could lead to a significantly larger move in financial markets.
Outside of the earnings figure, Labelle and Hollenhort are expecting a pretty solid payrolls report today.
“We expect another solid month for job growth — 185,000 — and the unemployment rate to tick back down to 4.3%, the same level as in May.”