A Negative Jobs Print?

We will provide a more detailed jobs report preview tonight, but following a catastrophic JOLTS report yesterday and a stellar weekly jobs report today, there appears to be a crescendo of confusion over what to expect tomorrow, with some saying a blowout number is coming while others are bracing for a negative print. So here is a quick take on what may be coming.

October’s US non-farm payrolls will hit the wires tomorrow morning, just 4 days days ahead of the US presidential election. As SocGen’s Albert Edwards notes, amid scepticism about the recent strength of the data, a shockingly weak ‘payback’ month will make news headlines and likely affect the election outcome.

It all started with Fed Governor Waller who two weeks ago first warned of a huge one-time drop in this month’s jobs report:

I will be looking for more evidence to support this outlook in the weeks and months to come. But, unfortunately, it won’t be easy to interpret the October jobs report to be released just before the next FOMC meeting. This report will most likely show a significant but temporary loss of jobs from the two recent hurricanes and the strike at Boeing. I expect these factors may reduce employment growth by more than 100,000 this month, and there may be a small effect on the unemployment rate, but I’m not sure it will be that visible. Since the jobs report will come during the usual blackout period for policymakers commenting on the economy, you won’t have any of us trying to put this low reading into perspective, though I hope others will.

The baton of a payroll plunge preannouncement was then handed over to the Biden admin’s favorite house economist Claudia Sahm – who is invoke to call “Sahm Rule” (which she stole from fromer Goldman economist Ed McKelvey) recessions when a Republican is in the White House… just not a Democrat -  thinks an outright decline in October payrolls is plausible because of the impact of recent hurricanes and the Boeing strike.This is how she explains it:

Let’s start by assuming that the underlying pace of payroll gains is back to its 2017-19 average of 183,000 per month. (The dark blue bar on the left below). Setting aside the hurricanes and Boeing strike, the initial estimates are always imprecise. The 90% confidence interval based on survey sampling error is +/- 130,000. (The light blue bars.) So, even if payrolls were on trend, the estimate range could be large.

The orange bars to the right subtract 100,000 off the trend for Hurricanes Helene and Milton and the Boeing strike. When the confidence interval is added, the 90% lower bound is almost -50,000. A negative print would ruffle some feathers, but at least in this example, it could be consistent with a solidly growing labor market.

And then there is the White House itself: yesterday, Biden’s top economic adviser Lael Brainard, explicitly warned that the White House is expecting a lower US non-farm payroll reading on Friday, covering October, because of disruptive strikes and hurricane impact (consensus expects only a 110k gain after September’s unexpectedly high 254k).

To be sure, there is a reason to preannounce a negative print: that way when it does hit, regime and establishment economists can say “we told you so”, and “just ignore it” because it is all one time (they will also tell you to ignore the sudden, 6-sigma collapse in job openings and quits, but that’s another story).

The problem with this is that it may not work. As Edwards writes, “readers with long, baby-boomer memories might recall the 1970 UK general election when the then Labour PM Harold Wilson was expected to win by a landslide, but had the rug pulled out from under him by shockingly poor trade data (which used to matter) – see article here.

The bottom line is that very poor economic data – and in the case of a negative jobs print it would truly be a shock as the last time we got that was back in 2020 – released just ahead of an election can really hurt the incumbent. Indeed, the surprisingly weak September JOLTS data suggests that a very weak payroll report on Friday morning is entirely plausible, even if that probability was somewhat diluted by today’s unexpectedly strong initial jobless claims report.