April's outsized expansion may have been exacerbated by the five-week survey period. Still, data in line with our May forecast would imply that the labor market continues to post healthy growth. Such an increase would also extend the string of alternating strong and weak reports for the first four months of 2005.
MOTHER NATURE. We also expect the unemployment rate to hold at 5.2%, in line with the median forecast. Among other components of the May report, the work week is projected to drop back to 33.8 hours (median 33.8), from the surprise jump to 33.9 hours in April. Hourly earnings are expected to rise 0.2% (median 0.2%).
The report should keep the dueling story lines of strength and weakness alive in the financial markets, but with "soft patch" concerns more solidly concentrated in the factory sector. Downside risk in May payrolls is provided by factory-sentiment reports such as the Institute for Supply Management survey. We now project a 15,000 drop in factory employment in May, which would prove a significant drag on the overall payroll figure.
Another negative signal comes from Mother Nature. Though monthly total precipitation data are not complete, the month was the coldest May in 12 years, and weakness in apparel and department store sales have been attributed to shortfalls in seasonal buying. This pattern may also hurt the retail employment figures and other seasonal-related businesses.
NET NEGATIVE SIGNAL. The other May labor-market data available thus far provide a more positive set of signals for the month. Initial jobless claims have risen slightly from the April figure but have extended their lower trajectory in 2005 from the prior year. They remain at levels that historically have corresponded with payroll growth closer to 200,000 than our own 165,000 estimate.
The "current conditions" series from the consumer confidence reports provided by the Conference Board and the University of Michigan have remained upbeat this month, and the "job strength" index remains solid as well.
Overall, we view the overshoot of payrolls in April and the weakness in the employment data from the ISM survey and temperature readings for May as a net negative signal for the May employment report. Yet, the initial claims and consumer confidence data remain strong. The market will continue to face the issue that reported payroll gains this year may be low-balling the likely revised levels that will be released next February.
How will the May jobs report be received by the Federal Reserve? Unless there's a big surprise, we expect Alan Greenspan & Co. to maintain its "measured" pace of rate hikes, with the benchmark Fed funds target rate piercing 4% by yearend. MacDonald is director of global investment research and analysis for Action Economics