Economic Focus -- From Action Economics
Jobs: Look for Lower Losses in September
Elsewhere in the report, we expect the jobless rate to rise to 9.8%, from 9.7%, the average workweek to hold at 33.1 hours, and average hourly earnings to increase 0.2%.
Here we look at some of the data that helped us arrive at our September forecast:
The August employment report revealed that both goods-based and service-based payrolls are continuing to show a diminishing pace of job loss relative to the hemorrhaging earlier in the year. Goods-based payrolls declined "only" 136,000, which (after July's decline of 122,000), marks the second-smallest drop since last September. Private-service payrolls declined just 62,000, which marks the smallest decline since April 2008. We expect this trend to continue in September, with declines of 120,000 for the goods sector and 40,000 for services.
Upside risk? Mild hurricane seasonThe September seasonal factor for payrolls generally marks the start of the seasonal build in employment toward Christmas, following the smallest seasonal adjustment of the year in August. This could weigh on payrolls if the economy fails to show the usual ramp-up, just as the seasonal climb on payrolls between February and June likely weighed on those figures as well.
Hurricanes can be a big factor in September—as was the case in 2004, 2005, and 2008. But the hurricane season has been very mild this year, particularly in September, implying little weather distortion. Indeed this actually suggests some upside risk to the forecast, to the degree that seasonal factors capture some risk of adverse weather.
The ADP Employment payroll survey for September, released on Sept. 30, revealed a 254,000 drop in private payrolls, which is consistent with a 244,000 nonfarm payroll decline if you assume a 10,000 rise in government payrolls. Improvement in the monthly ADP figures has lagged the monthly jobs report, and this pattern likely continued in September. The ADP industry breakdown showed a 151,000 September drop for jobs among goods producers—with a 74,000 decline at factories—alongside a 103,000 drop for service employment. This mix parallels our component forecasts for Friday's payroll report, albeit with a weaker aggregate trajectory.
The ADP figures for this cycle, broken down by company size, have continued to show a skewing of job loss toward medium- and small-sized firms vs. large firms, as opposed to the last cycle. The spread was then more uniform, although the distribution this time around is proportional to segment-size, unlike in 2001.
Consumer confidence: in recessionWhile the weekly initial jobless claims figures through September continue to sit well below the recent all-time high of 674,000 reached in late March, it is disappointing that we have not seen a more notable downtrend in initial claims. Through the September BLS survey week, in which data is collected for the month's employment report, initial claims were still at an elevated 551,000. While restructuring and retooling in the auto sector distorted the data in May, June, and July, we should now be seeing a substantial drop-off in claims. Although the recent declines for claims are encouraging, persistent lofty levels suggest that layoffs remain high despite improvement in job creation.
The consumer confidence surveys have painted a mixed picture for September. The University of Michigan's Consumer Sentiment Survey rose to 73.5, from 65.7. However, the Conference Board's Consumer Confidence Survey unexpectedly declined to 53.1, from a revised 54.5. Overall, consumer confidence has rebounded well above the lows seen in late 2008-early 2009, although confidence still remains at recessionary levels—highlighting notable ongoing consumer concern.
The various factory-sentiment measures have also continued their uptrend from the March low point, although the surprising decline in the September Chicago purchasing managers' index on Sept. 30 provides a counterweight. Not surprisingly, the employment components of the available factory-sentiment reports have risen from the first-quarter lows, with big gains through July and August that likely reflected the vehicle-assembly bounce from bankruptcy-depressed May and June levels.
In total, we expect the September jobs report to extend the pattern of diminishing payroll declines, as signaled by a moderating path for initial claims, rising vehicle output, ongoing gains in factory sentiment, improving consumer confidence, and the return of overall gross domestic product growth to positive territory. We continue to expect a return to positive monthly payroll changes by yearend, as GDP growth returns to the range of 2% to 3%. But until payroll growth reaches the 120,000 to 130,000 monthly range that typifies growth in the labor force, the jobless rate should continue to climb. We now peg that peak at 10% around December.