May US NFP: Will They Get Back on Track?

There is a lot riding on the result of the NFP coming out tomorrow. There are quite a few moving parts to what’s going on, and it could get markets jumpy not just after the data release, but in the lead-up as well.

The key question is whether last month’s massively disappointing data was a fluke or part of a new trend. There have been arguments that April’s surprisingly low numbers were due to technical reasons.

There is hope, therefore, that in May we could see a return to hiring on the scale needed to shore up the economic recovery.

How that could work

First, let’s look at the expectations for the headline NFP.

Analysts have pared back their expectations after the major miss last time, and there is a really shaky consensus around 650K jobs created, compared to the 266K reported last time.

However, the range of expectations runs from 450K to 800K, with few analysts expressing confidence after the consensus has been wildly wrong every month this year.

The second thing to pay close attention to is the revision of the prior month’s numbers. This happens every time but hasn’t been this important in quite a while.

The initial consensus was for a million jobs created, which would be in line with the 916K created in March. We could see a substantial revision to the April figures, which could significantly boost market sentiment.

If the prior numbers are revised to a range of around 600K, then it likely would mean that the hiring trend has remained relatively stable, and it was just a measuring quirk that gave us the result from last month.

How likely are the predictions?

Last month, ADP totally failed to predict what the result of the NFP would be. It came in just below expectations, showing 742K jobs created. (If the prior NFP figure is revised, however, it would show ADP was substantially correct all along.)

This time, ADP figures are being released one day later, due to the holiday at the start of the week. They are expected to fall to 650K.

A substantial miss in ADP could sour the market ahead of the main data release, as traders weigh the possibility of confirmation that the US jobs market might be in trouble.

What else to keep in mind

Continuing jobless claims have been trending downwards, reaching post-pandemic lows. This suggests that the NFP figures might come in better than anticipated.

However, this doesn’t necessarily mean that employees are moving back to work in substantial numbers. The labor force participation rate has remained stubbornly at 61-62% through the post-pandemic period.

The unemployment rate is expected to move down to 5.9% compared to 6.1%, while the average hourly earnings are expected to increase a paltry 0.2% compared to 0.7% prior. What this suggests is that analysts are expecting more entry-level jobs to have been filled in the last month. That’s the segment of people most unwilling to return to work, given the generous benefits. In other words, it’s a similar situation going into the NFP as we had last time.

However, in the meantime, several states have cut unemployment benefits in a bid to get people back to work.