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Action Economics expects the U.S. employment report for June, scheduled for release on July 2, to show a 140,000 decline in nonfarm payrolls on the month. The main factor will be a hefty 240,000 drop in government employment, reflecting a 226,000 decline in census hiring.
Our forecast also includes what could be seen as a relatively optimistic 100,000 rise in private payrolls that will outpace the 41,000 gain in May, though it would fall short of the 218,000 jump in April and the 158,000 gain in March.
We expect the jobless rate to rise to 9.8 percent, from 9.7 percent, the average workweek to hold at 34.2 hours, and average hourly earnings to rise a subdued 0.1 percent.
The report should also show a 35,000 drop in goods-based employment that is led by a 40,000 decline in construction employment while manufacturing jobs rise 10,000. We expect private service employment to rise 135,000, with the increase again led by temporary employment, as well as education and health. A figure in line with our forecast would mark the sixth straight month of positive growth for private service jobs.
For 2010, the census contribution to government employment climbed to a cumulative peak of 564,000 in May before beginning its descent, which was just a tad above the 530,000 peak seen in May 2000, though well above the 335,000 yearly high-point in May 1990. The May 2010 figure fell short of the earlier 635,000 estimate from the Commerce Dept. Our estimate reflects the weekly Census Bureau figures for census hirings, as these figures dropped back to 344,000 for the week of June 6-12, compared to 574,000 during the week of May 9-15. The climb to the May peak should be quickly reversed by the fourth quarter, as was the pattern in past census periods, and as hiring levels have already fallen by nearly half.
We assume a 0.1 percent gain in average hourly earnings in June, which should leave the year-over-year gain holding at the same 1.9 percent seen in May. Earnings on a year-over-year basis continue to hover near cycle and record lows. Historically, the cyclical moderation in earnings lags the economy, and the slack in the labor market should keep wage gains at or near all-time lows through 2010.
Here is a look at some of the other labor market indicators that factor into our forecasts:
The ADP Employment payroll survey, scheduled for release on June 30, is expected to show a 55,000 gain, matching the May increase—following prior gains of 65,000 in April and 32,000 in March—leaving a far less erratic pattern than seen in the private nonfarm payroll figures. The June ADP industry breakdown is likely to reveal a 55,000 drop for jobs among goods producers with a 10,000 factory-job gain, while service employment rises by 110,000.
Other labor market indicators have exhibited a weakening pattern into June that may signal net downside risk for the month's jobs data. The most troublesome pattern in recent labor market indicators has been the backup in weekly initial jobless claims, following a more general leveling pattern since February. Initial claims have averaged a surprisingly lofty 465,000 in June, compared to 460,000 in May and in April, and 450,000 in March. While we are well below the high of 643,000 in March 2009, claims remain well above the sub-400,000 figures seen as recently as June 2008.
Initial claims lagged the deterioration in payrolls during the recession and perhaps they will now similarly lag payroll improvement with the recovery, though the most recent divergence has been particularly troublesome. We continue to assume that claims will fall to 420,000 by the end of 2010, with the reversal in census hiring helping to reconcile initial claims with payrolls.
The cyclical uptrend in most consumer confidence measures has stalled since late 2009 at levels that remain consistent with recession, though we have clearly recovered from the cataclysmic lows set in early 2009 and there does remain a modest uptrend tilt in the trend for most gauges.
Gains in factory sentiment have mostly stalled in June, following recent peaks that were centered around April, with a weakening pattern in the employment components.
Overall, the June payroll report will mark the reversal for the census hiring process which will put a negative spin on the payroll headlines for June, July, and August. Market economists will focus on the private payroll figure to better gauge the underlying strength of the labor market and we still expect an improving pattern for this measure, following a disappointment for the May figures but an overshoot of what we see as the likely trend in both the March and April reports.
We see the net risk in the report that the negative payroll headline will combine with downside surprises for some of the job market components—and weakness in other labor market indicators—to reinforce the recent market narrative of a stalling recovery and a possible "double dip" recession.