Everyone has their eyes on tomorrow's employment report, considered to be especially important as it could clear any final hurdles to additional Federal Reserve easing at the next meeting. Can this week's data give us any hints of the outcome?
The week began with the ISM manufacturing report, with the headline number ticking down just a notch:
Many of the underlying details were also little changed, with some notable exceptions. The inventory component climbed 4 points while the prices paid component rose 14.5 points, suggesting that firms are being hit by both weaker demand and higher costs. Not a great combination for profit margins. The production measure slid 4.1 points, pushing it into negative territory:
And the import component also slid into negative territory, suggesting additional domestic weakness in the sector:
In short, softer, but not devastatingly so. Generally consistent with Fed easing in the past. On the other side of the coin, the ISM non-manufacturing report came in higher, and, notable as far as the employment report is concerned, the employment component rose 4.5 points:
Also on the generally positive side was the gain in the ADP payrolls numbers, with private employees rising by 201k in August. Finally, initial claims were somewhat lower than in August. You can take these bits and pieces to create a quick model of the monthly change in nonfarm payrolls as a function of the ISM employment index (NMFEI), the monthly change in the ADP report, and the monthly change in initial claims:
The model forecasts a nonfarm payroll gain of 198k for August. To be sure, the standard error of 88k is large in terms of payroll forecasts; I wouldn't be surprised by anything between 110k and 290k. That said, the current consensus is 125k with a range of 70k to 177k, which seems low to me. So when Bill McBride concludes:
Overall it seems like the August report will be somewhat stronger than expected.
I find myself in agreement.
Bottom Line: The range of consensus forecasts for the August employment report look to be on the low side of what we should expect. If the consensus is correct, then the odds of the Fed easing further this month will swell; 125k or lower seems too low to rapidly alleviate what Federal Reserve Chairman Ben Bernanke describes as a "grave" employment situation. But something closer to the top of the consensus range and above could throw a wrench in expectations for the next Fed meeting.
