Markets & Finance

A Merrier May for Job Growth


By Rick MacDonald The rebounding U.S. economy should help new jobs added in May to hit a new post-September 11 monthly high. That's what we at Standard & Poor's MMS expect to see in the May employment report, scheduled for release Friday, June 7. MMS forecasts that nonfarm payrolls will rise 65,000 for the month, which compares favorably to April's gain of 43,000 -- and the average monthly decline of 23,000 seen so far this year.

Overall, the figures should convey the same message delivered in the prior month's report: Labor market conditions are beginning to improve.

But some slack still remains. MMS expects the unemployment rate to rise to 6.1% in May from 6.0% in April. Two other key components of the report, average number of hours worked per week and average hourly earnings, should continue to show lackluster trends. Until we begin to see more of a pickup in these measures, it's our view that Federal Reserve policymakers will leave interest rates unchanged.

SOLID GAINS. The most encouraging part of the report should still be found in the factory and the related temporary-help components, as lean inventory levels for manufacturers -- and ongoing strength in demand -- continue to boost activity. Factory jobs are expected to decline only 15,000, while the private service industry is expected to reveal a solid payroll gain of 50,000.

The recent release of various manufacturing reports support the MMS outlook, with the May readings for both the Chicago purchasing managers' index and the manufacturing update from the Institute for Supply Management jumping to new post-attack highs.

Job growth in other industries, however, should be limited. Other recent employment data support this view. Weekly jobless claims, the employment subcomponent of consumer confidence, and the Help-Wanted Index, all remain at historically depressed levels.

MORE CAUTIOUS? In addition, seasonal adjustments imply a solid pace of payroll hiring in May that could prove difficult to achieve. New factors -- used to adjust payroll numbers for normal seasonal variations in hiring trends -- were released on Friday, May 30, for the coming six months, alongside revisions to the data for the previous two months.

These factors expect over 800,000 new workers to be added in May to the U.S. labor market due to seasonal demand alone, which represents the strongest adjustment of any month on the year. As such, the risk is that the uncertain business environment could leave employers more cautious about adding workers relative to the aggressive hiring trend implied by the seasonal adjustments.

We would also caution that additional downside risk lurks in weather-sensitive industries, such as construction. These payrolls were artificially boosted in the winter when record warm and dry winter weather kept activity at unusually high levels. But we've recently seen a pullback in these figures, as seasonal adjustments expect a ramp-up in activity that was already high.

EASY HURDLE. This "payback" for the borrowed strength in the winter should continue in May, especially given the cooler or wetter conditions seen in several parts of the country during the month.

Overall, it will be difficult to argue that labor-market conditions aren't continuing to firm unless job growth shows a substantial shortfall relative to market estimates, as comparisons over the past few months provide an easy hurdle to clear. And given that employment statistics generally lag behind economic activity, a more modest figure could easily be explained as an after-the-fact view of where the U.S. economy has already been.

As such, the market may have to wait a few months more to better gauge the extent to which the rebounding economy is providing support for labor-market trends. MacDonald is a senior economist for Standard & Poor's/MMS International


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