US: Potential upside risk for May employment report – Nomura

Analysts at Nomura note that the newly released estimates from the San Francisco Fed’s weather-adjusted payroll model, based on county-level weather patterns, suggest that weather may have played a large role in the underperformance of US payroll employment in April.

Key Quotes

“The numbers for April, with a weather-adjusted estimate of 339k versus the official BLS report of 164k, suggest that May could see a substantial amount of weather-induced positive payback. Moreover, the adjusted payroll numbers, produced by the research staff of San Francisco Fed President Williams (soon to be New York Fed President), suggest that the FOMC is likely to further discount the below-consensus reading on NFP.”

“The San Francisco Fed’s results are somewhat surprising given subdued readings in the household survey’s weather-employment variables. That survey, separate from the establishment survey where the monthly NFP change is captured, contains two questions related to weather, neither of which showed unusual variation. Moreover, in the establishment survey, average weekly hours, which tend to be more sensitive to inclement weather relative to employment, remained stable in March and April. These conflicting data signals increase the uncertainty around the potential weather impact on the May employment report.”

“We believe that the US economy is growing at a healthy pace supported by robust financial conditions, optimistic businesses and consumers, and a substantial boost to aggregate demand from fiscal policy. In that context, the general conclusion that weather was a drag on the reported level of payroll employment growth makes sense to us. Note our forecast for payroll growth in April was 220,000.”