Jobs: A Warming Trend in June

Action Economics expects the June employment report to show job losses moderating to 340,000, with the unemployment rate rising to 9.6%

By Rick MacDonald

We expect the Labor Dept.'s U.S. employment report for June, scheduled for release July 2, to show a decline of 340,000 in nonfarm payrolls on the month—nearly matching the 345,000 drop in May. The projected June payroll drop would be roughly half of the big 741,000 decline seen in January, when job losses reached their peak.

The jobless rate is expected to rise to 9.6% from 9.4%. The workweek should be flat in June following the 0.1-hour drop in May, leaving an hours-worked decline that should be about half the big 0.7% May drop. Hourly earnings are expected to increase 0.2% (median 0.1%).

The June figures should reflect the best round of payroll data since September, when financial markets and the global economy entered the period of panic-led collapse following the Lehman Brothers failure. The report should reinforce expectations that the hefty declines of the past several months are now diminishing, though we are still seeing a contracting economy.

Employment Data

Here is a look at some of the data that factored into our forecast:

The ADP Employment payroll survey for June, scheduled for release July 1, is expected to reveal a 350,000 drop in private payrolls for the month that falls well short of the 532,000 decline reported for May. The projected June figure would correspond to a –345,000 payroll figure if we assume a 10,000 rise in government payrolls. The ADP industry breakdown for June should reveal a 210,000 drop for jobs in goods producers with a 145,000 decline at factories, and a 140,000 drop for services.

The ADP figures, broken down by company size, continue to show a skewing of job loss toward midsize and small firms vs. large firms.

Weekly initial jobless claims figures have moderated in recent weeks well below the 27-year high of 674,000 hit during the week ended Mar. 28, despite being boosted by restructuring in the auto sector since early May. Initial claims in June are currently averaging 615,000 vs. an average of 630,000 in May, 631,000 in April, and 657,000 in March. This measure was under 400,000 as recently as last June.

Nearly all of the consumer confidence surveys are continuing to climb above the lows set in the fourth quarter of 2008 and first quarter of 2009. The June University of Michigan consumer sentiment survey pushed higher to 70.8 in June from 68.7 in May, and is well above the November low of 55.3. However, the Conference Board's consumer confidence survey retreated to 49.3 in June after soaring to 54.8 (revised from 54.9) in May, leaving a small correction following a three-month surge from the 25.3 all-time low in February.

Slower Pace of Payroll Decline

The various factory sentiment measures are also continuing to march higher. Not surprisingly, the employment components of most of these sentiment surveys have mostly posted gains in June in particular and the second quarter overall. These readings remain consistent with expectations of fewer job losses going forward.

In total, the monthly payroll figures are tracking a diminished pace of decline relative to the steep drops seen in the 2008 fourth quarter and 2009 first quarter. Diminishing labor market declines are tracking the moderating pace of decline in GDP from the –6.3% rate in the fourth quarter and the –5.5% pace in the first quarter to a projected –2.0% in the second quarter.

But while diminishing weakness is good news, labor market fundamentals remain soft relative to prior recessions. The unemployment rate should continue to rise as payrolls continue to fall short of the typical 100,000-120,000 monthly labor force gain, and should peak at 10.4% by yearend.

MacDonald is director of investment research and analysis for Action Economics.

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