Jobs: August Crunch Has Little Impact

Action Economics expects a non-farm payrolls gain of 120,000 on the month, based on anticipated rebound in government jobs and still-tight factory sector

by Michael Englund

Wall Street will be looking for evidence that global credit market turmoil took a toll on U.S. job growth in August, as detailed in the employment report for the month, scheduled for release Sept. 7. We at Action Economics think that available indicators suggest only limited impact on the month. Why? The headline non-farm payrolls figure will enjoy a bounce in government job growth. Meanwhile, weekly jobless claims have risen only modestly, and factory indicators suggest a still-tight labor market.

We expect non-farm payrolls to rise 120,000 in August (vs. economists' median forecast of 113,000), while the unemployment rate holds steady at 4.6% (median 4.6%). We expect the average workweek to rebound to 33.9 hours (median 33.8) from 33.8, and hourly earnings should increase 0.3% (median 0.3%), which would leave year-over-year growth at 4%.

Here are some of the key indicators that factored into our forecast:

The ADP Employment survey for August (released Sept. 5) revealed a 38,000 gain in payrolls for the month that translates to a 113,000 non-farm payroll gain, if you assume a 35,000 August bounce in government jobs following an unexpected shortfall in July. Our July payroll estimate was trimmed to 120,000 from 130,000 based on this figure.

Looking at other labor-market indicators, the weekly jobless claims data have bounced from the surprising lows in July, though readings here are still consistent with a healthy labor market. Initial claims are tracking a 326,000 average in August, compared to month-average figures of 307,000 in July, 319,000 in June, 306,000 in May, and 327,000 in April. Initial claims reached a 325,000 level during the Bureau of Labor Statistics' survey week for August—during which the data for the jobs report is compiled—which follows a lean 303,000 reading in the July BLS survey week, 326,000 in June, 296,000 for May, and 341,000 for April.

Hefty Gain in Vehicle Sales

The University of Michigan's consumer sentiment index and the Conference Board's consumer confidence index both revealed sharp declines in August due to the heightened financial market turmoil. The Michigan survey dove to 83.4 from 90.4, while the Conference Board survey fell to 105 from 111.9. We saw a similar decline in the February-April period of market turmoil, which proved short-lived and had little effect on employment or spending.

We largely expect a similar result this time as well, although we have pegged our August retail sales estimate to a 0.5% gain due partly to expected credit market effects on spending for big-ticket items. Yet vehicle sales posted a hefty 5.6% gain in August that defied notions that the credit crunch was affecting auto financing. It has yet to be seen if appliance and furniture sales will be affected, both due to a direct link to financing, and via sensitivity to the beleaguered housing sector.

The employment components of the July factory sentiment surveys were generally solid in August. The Empire State employees index rose to 11.6 from 11.4, while the workweek jumped to 16.1 from 6.2. The Philly Fed survey's employees' index jumped to 21.2 from 4.1, while the workweek rose to 13.1 from 0.0. The Chicago PMI employment component fell to 53.7 from 61.6. The ISM employment component rose in August to 51.3 from July's 50.2.

Some Risk of Hiring Pause

The mix leaves stronger readings nearly across the board in August vs. July, which caps downside risk to this sector beyond the usual small but steady declines for the factory job count.

In total, while there is some risk that negative financial market headlines may result in a pause in some hiring decisions, and layoffs in the mortgage industry could weigh on job growth over the near term, we expect the August jobs report to largely show continued trend-growth in the labor market. Momentum in the job market should continue to provide support for consumption and gross domestic product growth through late 2007. While job growth remains on track to moderate through 2007, the slowdown remains modest, with an unemployment rate that is still at historically tight levels.

The mix should be consistent with ongoing strength in wage growth that will remain an irritant to the Federal Reserve's efforts to bring consumer inflation within the 1% to 2% comfort zone on a sustainable basis.

Indeed, should the August jobs report come in close to our expectations—and wage growth show continued strength—the Fed will have fewer reasons to ease monetary policy. We don't believe a rate cut at the Sept. 18 FOMC meeting is as much a slam-dunk as the markets are assuming. Indeed, unless the few data releases between now and Sept. 18 are unambiguously weak, we suspect it will be a very tough call for Ben Bernanke & Co.

Englund is chief economist for Action Economics.