Investors are awaiting a critical non-farm payroll report today. The consensus forecasts is for a 220,000 gain, however Wednesday’s private payrolls data from ADP and data on U.S. productivity point to some downside risks. How does the U.S. labor market look like and what can we expect from the official employment report?
According to Bloomberg’s consensus estimates, economists are expecting that about 220,000 jobs were created in April, a sharp rebound from an unusually sluggish job growth of 126,000 in March. The forthcoming report is very significant for the gold market, because the second month of weakness could definitely take a June interest rate hike off the table (while a strong gain could revive talks about a hike during the June FOMC meeting).
Thus, if we see anything above 220,000, the gold prices will probably decline, while anything below 200,000 should be positive for the gold prices. However, investors should be aware that gold has been recently unable to find any consistent support from the weaker than expected data. The gold market did not react despite stagnant economic growth at 0.2 percent in the first quarter and the gold prices actually fell on Wednesday after negative private employment data.
According to the ADP report, the U.S. created only 169,000 private-sector jobs in April, much below the expectations of 200,000, and also fewer than 175,000 jobs created in March. This means that the U.S. private sector created fewer than 200,000 jobs for two months straight for the first time in about two years, and that job creation has been in decline for five months in a row. Although the ADP report can differ substantially from the U.S. government’s report, it provided a pretty good read for the last report.
The reason behind the weak job creation is the collapse of the oil prices and the strengthening of the U.S. dollar. Consequently, the manufacturing industry shed 10,000 jobs (most notably in Texas, perhaps), while other segments (services, construction) added jobs. It is not good news for the U.S. economy, since manufacturing, despite the popular opinions, is still a driving force of the economy.
Another piece of news which creates some downside risk for today’s employment report, is U.S. productivity, which declined at a 1.9 percent annual rate during the first quarter of 2015 (the first consecutive quarterly plunge since 1993), according to the Bureau of Labor Statistics. The fall in productivity results from a 1.7 percent rise in hours worked and a 0.2 percent decline in output. In other words, Americans worked more, but produced less. What is more, the unit labor costs in the non-farm business sector increased by 5.0 percent in the first quarter, reflecting a decline in productivity and a 3.1 percent increase in hourly compensation, to a large extent due to the rise in minimum wage in many states. So, the U.S. companies paid their employees more for less output. Does it sound like a good deal? Not at all, so a rise in minimum wage and a decline in U.S. labor productivity will hit employers and make them less eager to create new jobs. Also, according to the marginal revenue productivity of wages, wages will not increase significantly without a rise in productivity (minimum wage hikes may raise wages for those already employed, but they will dampen job creation). It is good news, because sluggish wage growth may induce the Fed to postpone or softer the pace of the tightening.
To sum up, all eyes are on today’s employment report, which would be critical for the FOMC decision on the timing of the interest rate hike, and for the gold market. The possibility of a strong jobs report was supported by Thursday's data on weekly claims for unemployment benefits; however, Wednesday’s data on labor productivity and private non-farm payrolls shows significant downside risks.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
Gold News Monitor
Gold Trading Alerts
Gold Market Overview
