Payroll gains at risk of stalling - Capital Economics
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Payroll gains at risk of stalling

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Written by Michael Pearce
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We expect a further slowdown in the pace of non-farm payroll gains to 400,000 in November, as the recovery in the employment-intensive restaurant and leisure sectors stall.

We expect a further slowdown in the pace of non-farm payroll gains to 400,000 in November, as the recovery in the employment-intensive restaurant and leisure sectors stall.

The 638,000 gain in non-farm payrolls last month was the third consecutive month of slower headline employment growth, although the underlying details were more encouraging, with the alternative household measure of employment rising by 2.2 million. A drop in temporary census hires subtracted 148,000 from headline payroll growth in October. The drag in November will be around 95,000, as the remaining workers finished their jobs. There was also a further 159,000 decline in state & local education employment in October, which we doubt will be repeated this month.

Unfortunately, it seems that underlying payroll growth slowed sharply in November. Admittedly, the employment component of the Markit composite PMI rose sharply in November, to a record high of 57.4. It would be unusual for employment growth to be slowing sharply when the survey evidence is strengthening. But the relationship between the PMIs and payroll growth has been off since the pandemic hit and, at its current level, the PMI points to private payrolls rising by around 300,000, which is less than half the pace in October. (See Chart 1.)

Chart 1: Markit Employment PMI & Private Payrolls

Sources: Refinitiv, Markit

More worrying has been the deterioration in the high-frequency indicators that we track, with OpenTable restaurant diner figures showing a sharp slowdown. That is not just a one-off either, with consumer surveys showing people less willing to spend time in restaurants. Both measures suggest we could see food service payrolls fall outright in November, and potentially plunge in December. (See Chart 2.) Consumer footfall in malls and other leisure venues appears to have held up well so far, suggesting that the hiring picture in other service sectors will be more robust but, with case numbers still rising nationally, the balance of risks increasingly lies to the downside. The continued recovery in the manufacturing sector is a bright spot in the recent economic data, but that doesn’t move the needle much for payrolls growth, given that the sector accounts for less than 9% of employment.

Chart 2: Share of Population Dining Out & Payrolls

Sources: Refinitiv, Axios-Ipsos

Overall, we estimate that non-farm payrolls increased by 400,000 in November, which would still leave total employment 9.6 million below the pre-pandemic February level. Following the blowout gain in the household measure of employment last month, we wouldn’t be surprised to see that drop back in November. There is also plenty of scope for the labour force to rebound, so we are braced for a rebound in the unemployment rate, which we think could rise to 7.2%, from 6.9%. With low wage leisure sectors suffering the worst from the third wave, the average hourly earnings figures will once again be distorted by composition effects, artificially boosting earnings growth.

Table 1: Employment Data

Labour Market Indicators

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov1

Implication for Payroll Growth

Jobless Claims (Monthly Ave.)

5,040

2,608

1,499

1,369

993

870

791

746

Better

Jobless Claims (for week including the 12th)

4,442

2,446

1,540

1,422

1,104

866

797

748

Better

Challenger Job Cut Announcements (SA)

705.2

384.9

187.5

285.6

124.3

125.9

84.4

Better

Job Openings Rate

3.7

3.9

4.2

4.6

4.3

4.3

Markit Manufacturing Employment Index

37.7

38.2

47.6

49.8

53.2

52.6

51.3

51.6

Better

Markit Services Employment Index

37.4

39.2

48.1

50.2

55.2

54.4

53.1

58.6

Better

ADP Private Payroll Employment Survey

-19,409

3,341

4,486

216

482

753

364

Worse

CE Estimated Change in Non-Farm Payrolls

-22,500

-9,000

5,000

1,000

1,000

800

600

400

Consensus Forecast for Non-Farm Payrolls

-4,250

-8,000

3,000

1,600

1,400

850

600

520

Actual Change in Non-Farm Payrolls

-20,787

2,725

4,781

1,761

1,493

672

638

Actual Change in Private Payrolls

-19,835

3,236

4,729

1,526

1,028

892

906

Consensus Forecast

Other Employment Report Data

Unemployment Rate (%)

14.7

13.3

11.1

10.2

8.4

7.9

6.9

7.2

6.8

Change in Household Employment

-22,369

3,839

4,940

1,350

3,756

275

2,243

All Employees Hours Worked

34.2

34.7

34.6

34.6

34.7

34.8

34.8

34.9

34.8

All Employees Ave. Hourly Earnings (%m/m)

4.7

-1.1

-1.3

0.1

0.3

0.0

0.1

0.3

0.1

All Employees Ave. Hourly Earnings (%y/y)

8.0

6.6

4.9

4.6

4.6

4.6

4.5

4.4

4.3

Sources: Refinitiv, Markit, Capital Economics

1Figures in blue are forecasts

Chart 3: Actual & Estimated Change in Non-Farm Payrolls (000s)

Sources: Refinitiv, Capital Economics


Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com