NFP Preview: Disappointment ahead ?

Tomorrow’s nonfarm payroll employment report for December may come as a bad surprise for most market participants. The consensus expects that job creation will drop to 100K from 245K in November, with the unemployment rate (U-3) remaining unchanged at 6.7%. Judging by the available data, the consensus might be a bit too rosy. Aligned with the December’s ADP report (out at -123K), the nonfarm payroll report may see a decline of jobs in total U.S. employment in December, which would be the first time since April if confirmed. Though it might be transitory, a negative print would be a shock to most investors that viewed the U.S. economy as fairly resilient in year-end.

There are two main reasons that could explain the deterioration in the U.S. labor market:

• Confronted with rising numbers of Covid cases, many States have re-introduced restrictions and partial lockdowns in December, with the tougher lockdown being implemented in California. It is likely to result in a large decline in job creation in the services sector, which has already been captured by the ADP report (negative print at -105K with the sectors most vulnerable being leisure & hospitality, and trade & transport). Real-time data confirms the impact of the pandemic on economic activity, then pushing employers to pull back on hiring in December. If we only look at visits to retail and recreation stores, one of the most affected sectors by the pandemic, activity has decreased by a stunning 28% in December compared with the baseline. The extent of the decline is more or less similar to that in March when the outbreak started.

   

• Another factor that could explain the sluggish dynamics in the labor market is the continued decline in state and local government employment. After providing intense support to the economy in the worst period of the pandemic, many state and local governments had no other choice but to shed labor to balance budgets. Since the beginning of the crisis, total government employment has decreased by 1,31 million with a decline of 585K over the past three months. However, with the new stimulus package worth $900bn expected to kick off in the coming weeks, we could see this trend stops or even reversed in January-February.