Markets & Finance

A June Jump in Jobs?


The U.S. government's June employment report, scheduled for release July 7, could pack quite a surprise for forecasters. We at Action Economics expect the report's headline nonfarm payrolls number to post a 230,000 gain, following the subpar 75,000 increase in May.

Among other components of the report, the unemployment rate is expected to hold at 4.6%. The average workweek is expected to remain at 33.8 hours (median 33.8), while average hourly earnings are expected to rise 0.2%.

We lifted our payrolls forecast on July 5 after the release of the ADP Employment survey, which showed a 368,000 surge in private employment on the month. Other labor-market indicators point to strength in June. Initial jobless claims in the month have fully reversed the Puerto Rican government strike distortion in May, and passed through June at remarkably lean levels. Moreover, continuing claims have recently hit a new expansion low, and suggest continued downside risk in the unemployment rate.

NOT MEETING EXPECTATIONS. The current conditions series from the University of Michigan's consumer sentiment index, and the Conference Board's consumer confidence survey, which tend to be more dependent on labor market conditions, both revealed a bounce in June following weaker figures in May. The current series from Michigan jumped to 105.0 from 96.1 in May, while the current series from the Conference Board remained at a historically high 132.7 from 134.1.

The employment components from the factory sentiment surveys have been more negative, suggesting downside risk for factory employment. The ISM employment index fell sharply to 48.7 from 52.9. The Empire State employment index fell to 5.1 from 9.7. The May employees index from the Philly Fed survey rose to 6.8 from May's 1.1 -- which was the lowest reading since November, 2003. The Chicago PMI employment measure moderated to 50.4 from 52.8.

Payroll growth has averaged only 146,000 over the last six months, versus the higher 157,000 average gain of the past two years. The average median forecast over the last six months was 203,000, however, leaving an average shortfall over the last six months of 57,000. Strength in most labor market indicators has consistently suggested a firming labor market over the period, yet these signals have failed to translate to any acceleration in payroll growth in the establishment survey, as job gains by this measure have actually moderated.

RETAIL WEAKNESS. The gap between the actual payroll figures and median forecasts is being aggravated by the recent trend over the last four months of downward revisions in prior-month's data from the initially reported figures. This is the opposite of the pattern seen through much of 2005.

A handful of industries have accounted for much of the shortfall in payrolls relative to expectations in recent months. We have seen notable weakness in retail trade over the last two months, with payrolls for this industry falling a hefty 73,000. The last time we saw a worse stretch was in March, 2003, when we saw three straight months of declines on Iraq War uncertainty. This is surprising given continued strength in nominal consumption.

The bellwether "temp" employment series has also dropped in four out of the last five months, the worst stretch since late 2002. Construction has added an average of 6,000 over the last three months versus the 27,000 average over the previous two years. Data from the manufacturing sector suggest that the post-hurricane surge in factory output is moderating. The market will be anxious to get more insight into whether the recent softness in these industries is noise, or is setting a lower trajectory for job growth in the second half of the year.

THE FED'S CHALLENGE. And while Wall Street will be keying on June's headline nonfarm payrolls number, the Federal Reserve will be focusing on what the report has to say about wage growth, and its implications for overall inflation. The June wage gain is poised for restraint similar to May, after unexpected strength in the prior five months.

If we look at the "real" wage gains in recent periods, it is noteworthy that wages are still having trouble keeping pace with headline inflation. Though wage growth resumed its usual cyclical uptrend as the unemployment rate dropped down through 5.5%, there does not appear to be much evidence of cost-push inflation pressure.

Wage growth on a year-over-year basis has been rising steadily since the start of 2004, however, and appeared ready to provide a new challenge to the Fed when the year-over-year rate surged to a 4.2% cyclical peak growth in April. Such a gain—alongside our expectations of a 33.8-hour average workweek, a 5,000 factory jobs decline, and an unchanged unemployment rate at 4.6% in June—will leave key economic output indicators on track with the solid growth trajectory of the past two years.


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