Investing

Jobs Report May Show Improvement


For the Aug. 7 employment report, Action Economics expects nonfarm payrolls to show a drop of 320,000 (the median forecast is 330,000) in July. This would mark the best jobs reading since August of last year, as the monthly swings continue to claw their way back toward zero while gross domestic product growth posts a third-quarter swing back to positive territory. The jobless rate should rise to 9.7% (median forecast is 9.6%) from 9.5%, the workweek should hold at 33.0 hours (median 33.0), and hourly earnings should post a 0.1% (median 0.1%) gain.

On Aug. 5 the ADP Employment payroll survey revealed a 371,000 drop for July. The prior monthly drop was 463,000. The July ADP figure corresponds to a decline in payroll of 361,000, if we assume a 10,000 rise in government payrolls. The ADP industry breakdown for July showed a 169,000 drop for jobs among goods producers with a 99,000 decline at factories that almost exactly matched our assumptions, alongside a 202,000 drop for services that accounted for the downside headline surprise.

In July midsize companies posted a hefty 159,000 drop in jobs, following a 203,000 drop in June, and an average monthly drop in the six months before that of 274,000. Small business payrolls fell by 138,000 in July, following a 169,000 drop in June, and a drop of 233,000 per month over the prior six months. These payroll categories are declining at rates that considerably exceed the 2001 recession peak rates of 190,000 for medium-size firms, and 128,000 for small firms.

In contrast, large firm payroll declines this time around are short of the 110,000 peak rate from 2001, with a 74,000 drop in July, a 91,000 drop in June, and an average monthly decline over the prior six months of 108,000.

Hourly Earnings Numbers Hourly earnings were flat in June and are expected to bounce by 0.1% in July, while the drop in the nonseasonally adjusted year-over-year earnings figure to 2.3% in June, from 3.0% in May, should be followed by a rise in July to 2.5%. The June figure marked the lowest rate since December of 2004, and we expect these lows to be extended later in 2009 to the 1.5% to 2% range, as weakness in the economy and a high jobless rate continue to weigh on wage figures.

Real earnings have posted a sharp bounce since the third quarter of 2008, thanks to the big commodity price free fall. We saw real earnings surge from a 0% annual rate in October to the current figure of 4.7% in May, as prices used to deflate the nominal earnings measure posted a big drop. Last year's big declines will scroll off the annual calculation through the second half of this year, hence allowing recent gains in real wages to be partly reversed.

Economists had underestimated the deterioration in the labor market in the September to January period, and then the median payroll estimates caught up with the reported payroll data through February to April. We wonder if economists are underestimating an improvement in payrolls now.

Good News for Payrolls? On a seasonal basis, July is second only to January in terms of net job attrition on the year. As such, this could be supportive for payrolls for the month as they aren't facing aggressive expectations regarding seasonal-based hiring. In addition, there could be less job loss this July given the lack of ramp-up in hiring over the spring and the pull-ahead of normal July auto industry job loss into May and June.

In total, the monthly payroll figures should continue to post moderating declines through the third quarter, and we expect to see a flat or positive payroll figure by the fourth quarter. The moderating rate of job loss should track the improving trajectory for U.S. GDP growth. We see the GDP posting a positive reading in the 1.8% area in the third quarter, following the 1.0% rate of decline reported for the second quarter, the 6.4% peak-rate of decline in the first quarter, and hefty 5.4% rate of decline in the fourth quarter.

Meanwhile, the jobless rate should continue to rise through yearend, as payrolls continue to fall short of the typical 100,000 to 120,000 monthly labor force gain, leaving a peak for the jobless rate that we still peg at 10.2%.

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