What's behind our forecast? Recent data on weekly first-time jobless claims and consumer confidence support the view that the labor market is stronger than what was seen in the June and July payroll reports, though the effects of Hurricane Charley, which struck Florida and the Southeastern U.S. in mid-month, may provide some downside risk to the report.
SLIPPING CONFIDENCE. The 325,000 to 350,000 range for initial unemployment claims through 2004 is historically consistent with monthly payroll growth of 150,000 to 200,000. As such, the small payroll gains in June and July likely represent a needed slowdown to put job growth for 2004 more in line with the claims figures, as the average monthly payroll gain for 2004 is now 177,000.
The markets focused on the drop in the headline figure for the August consumer-confidence release, issued Aug. 31. Confidence fell to 98.2 -- below the median forecast of 102.8 -- from July's revised level of 105.7. But the report's employment-related components remained consistent with a strengthening labor market. Still, the "Are jobs hard to get?" index ticked higher, to 25.8 from 25.7 in July, while the "Are jobs plentiful?" measure slipped to 18.1 from 19.7 -- leaving the so-called "job strength" index (the difference between the two series) at -7.7, from -6 in the prior month.
And while this marked a slight moderation for August, the level still represents a notable improvement from the -20 average seen over the last year -- and reflects one of the highest job-strength levels in two years. This suggests that underlying trends in the labor market continue to firm, despite the softness reported in the July employment report, as well as some other recent economic releases.
STEADY-STATE RATE. Another factor behind our view of an improving payrolls trend: the household survey data in recent employment reports. These figures, which are collected from household members rather than tax records at businesses and institutions surveyed for the nonfarm payrolls data, have revealed a surprising acceleration in job growth in recent months alongside the payroll growth slowdown. The household survey job count surged 629,000 in July, following a 259,000 increase in June.
We don't expect that discrepancy to continue, and as the numbers converge, we expect the unemployment rate to hold steady at 5.5% for several months, the median forecast.
Looking at the upcoming jobs report's other components, we see the average workweek rising to 33.8 hours from 33.7 hours in July (median forecast 33.7). The workweek uptrend in this cycle has been modest, and significant upside room exists for a rise in this figure as the expansion proceeds. Average hourly earnings should tick higher by 0.2%.
FED WATCH. If you assume that underlying fundamentals support payroll growth in line with the 2004 average thus far, then there's little reason to expect a "correction" in the August payroll data. Upside or downside surprises will help the market gauge the true underlying trend, and thereby the degree to which the strong March-May period should be seen as the aberration, instead of the weak June-July period.
Of course, the market's focus remains on how Alan Greenspan & Co. receive the outcome of the August jobs update. Ultimately, the report will determine the degree to which a weak labor market may restrain a central bank that otherwise seems quite comfortable with its current pace of "measured" interest rate hikes. Englund is chief economist and MacDonald director of investment research and analysis for Action Economics