Markets & Finance

Jobs: Look for More Improvement in August


Action Economics sees the drop in nonfarm payrolls moderating to 200,000 in the Sept. 4 employment report, while the jobless rate hits 9.5%

We expect the U.S. employment report for August, scheduled for release on Sept. 4, to show a decline of 200,000 in nonfarm payrolls—vs. economists' median forecast of a 236,000 drop—which would mark the best jobs reading since August of last year. The economy's return to a positive gross domestic product growth trajectory in the third quarter should translate to a diminished pace of job market contraction.

The jobless rate should tick up to 9.5% (median 9.5%), the workweek should hold at 33.1 hours (median 33.1), and hourly earnings should post a 0.2% (median 0.2%) gain, with a boost from the recent hike in the minimum wage.

The July industry breakdown of payroll declines showed a reduced pace of job market contraction for the goods-producing sector, likely due to the vehicle assembly rebound. We expect this pattern to continue in August, with a 120,000 payroll drop for the goods industries. Service-sector employment declines are continuing to moderate, and we expect an 80,000 drop in August.

Here is a look at some of the factors that informed Action Economics' August jobs forecast.

Downside Headline Surprise

The ADP employment payroll survey released Sept. 2 revealed a 298,000 drop in private payrolls in August, following a prior July decline of 371,000 that was revised to -360,000. The August ADP drop corresponds with a 288,000 nonfarm payroll decline if we assume a 10,000 rise in government payrolls.

The ADP industry breakdown for August showed a 152,000 drop for jobs among goods producers, including a 74,000 decline at factories, alongside a 146,000 drop for service employment, which effectively distributes the downside headline surprise across the major components.

While the weekly initial jobless claims figures through August continue to sit well below the recent all-time high of 674,000 hit in late March, it is disappointing that we have not seen a more notable downtrend in initial claims, which have remained in the 561,000-to-580,000 range through the first three weeks of August. While restructuring and retooling in the auto sector distorted the data in May, June, and July, we should now be seeing "clean" figures, and these recent data suggest that new layoffs remain brisk even if a pickup in hiring has helped to reduce net monthly job loss.

Most of the consumer confidence surveys bounced in August after hitting an air pocket in June and July. One exception was the University of Michigan's consumer sentiment survey, which moderated to 63.2 in August from 66.0 in July, although this figure remains well above the low of 55.3 in November. The Conference Board's consumer confidence survey improved to 54.1 in August from 47.4 in July. Overall, consumer confidence remains well above the lows seen in the fourth quarter of 2008 and first quarter of this year, although confidence still remains at recessionary levels—highlighting notable ongoing consumer fear.

Gains in Employment Measures

Not surprisingly, the employment components of the available factory sentiment reports have risen steadily from the first-quarter lows, and we have seen gains in both employment measures from the available Philadelphia Fed and Empire State reports for August, as well as the employment gauge from the August Chicago PMI report and the employment component from the Institute for Supply Management's August report.

The ISM's nonmanufacturing report for August, scheduled for release on Sept. 3, will help to guide the outlook for service-sector employment before the August jobs data. The data last month signaled downside risk to July job growth that largely failed to materialize, though a further downside surprise again in August may suggest some catch-up in Friday's payroll data. As it stands, however, we expect a rise in the ISM nonmanufacturing index headline figure to 47.5 in August from 46.4, alongside a rise in the employment measure to 44.0 from 41.5.

In total, we should continue to see moderating payroll declines through August that parallel the bounce in vehicle output and broader factory-sector measures of activity in the month, improving consumer confidence, a moderating path for initial claims, and the return of overall GDP growth to positive territory. Indeed, we continue to expect a return to positive monthly payroll changes by yearend, as GDP growth returns to the 2% to 3% range.

Until payroll growth returns to the 120,000 to 130,000 area that typifies growth in the labor force, however, the jobless rate should continue to climb, to a peak we now peg at 9.9% around December. Though the volatile monthly payroll figures always run the risk of backtracking, as was seen with the large 443,000 June payroll drop, the trend in the figures is clearly toward improvement.

MacDonald is director of investment research and analysis for Action Economics.

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