By Rick MacDonald
Where's the upside? The last two employment reports showed below-forecast job creation of 104,000 in May and 146,000 in June, despite strong signals from other economic reports indicating that the data could provide an upside surprise in non-farm payrolls. And the risk appears high for an overshoot in July's report, scheduled for release Aug. 5. But maybe this time we will really see a surge, given the strength in recent economic reports and particularly some encouraging labor-market data.
We at Action Economics expect a July payroll gain of 200,000, with the unemployment rate holding at 5% (median consensus 5%). The workweek is expected to hold at 33.7 hours (median consensus 33.7). Hourly earnings are expected to rise 0.2% (median consensus 0.2%), which should leave the year-over-year figure dropping to 2.5% from 2.6%. Data in line with our forecast would imply that the labor market continues to post healthy, if unspectacular, growth.
One reason to expect a big jump for the month is the pattern of oscillating monthly payroll gains seen over the last year. The notable undershoot in payroll growth over the last two months relative to both the median estimate and trend would be consistent with an upside pop for July.
CAUTION TO THE WIND.
Other available labor-market data also suggest strength in July payrolls. While weekly initial jobless claims have been distorted by the auto retooling period in July, underlying trends in initial claims have been encouraging. The average reading for July will likely be near 316,000, compared with an average 342,000 level for 2004 and the 326,000 average reading in the first half of 2005. The week that overlaps with the Bureau of Labor Statistics' survey week registered jobless claims of only 303,000 in July, compared with 316,000 in June and 322,000 in May.
Aside from general strength in these various labor-market indicators in July, other sales and output measures suggest economic activity accelerated during the period. It appears that business worries underlying the inventory correction in the second quarter made companies cautious about hiring. It's now clear that the caution was unwarranted, and the result should be upside risk for the third quarter that translates to strong employment growth.
Regardless of the month-to-month swings in the payroll data, employment as gauged by both the payroll and household survey are showing solid year-over-year growth that is approaching the rate of past expansions.
Consumer-confidence data suggest that the labor market continues to firm. The current data from the University of Michigan survey, which tends to swing with the labor market, rose to 113.5 in July from a preliminary level of 112.0, and a June reading of 113.2.
The implied "job-strength" index from consumer confidence (the difference between "jobs plentiful" and "jobs hard to get" responses) was -1.3. While this was a slight moderation from June's zero reading, this figure still remains well above the -10.9 reading seen in November, and the average reading of -11.4 in 2004 and -20 in 2003. It also remains at one of the highest levels of the past four years.
Employment data in surveys from the Institute for Supply Management also revealed a continued rebound in July. The ISM's employment data from its factory survey rebounded to 53.2, from June's 49.9 and May's 48.8, while the ISM non-manufacturing numbers remained at an impressive 56.2, from June's hefty 57.4. Given a rough rule of thumb that each index point above 50 for the non-manufacturing employment index equates to a 50,000 gain in non-manufacturing payrolls, this data suggest a 300,000 rise in payrolls for July.
CUTS TO THE QUICK.
But the pullback in the ISM-employment component in 2005 still implies residual downside risk for the factory-payroll component, and the related temporary-help employment data. Moreover, the temp-help info, which is more flexible in adjusting to current conditions, has been running softer than the factory-employment data.
The help-wanted index for June rose to 38 from 37, although the index remains below the recent peak of 41 in January and February. Interestingly, online want-ad volume doesn't appear to show a significantly different pattern. The Conference Board Help-Wanted OnLine Data Series -- which made its debut in July -- was flat. While this figure is essentially unchanged from May, it's up from 1.8 million new job ads posted online in April.
Less encouraging was the number of announced job cuts tallied by executive-placement firm Challenger, Gray & Christmas, which jumped 48% year-over-year, to a level of 103,000. This follows the 73% year-over-year jump in June, which marks the worst two-month deterioration since December, 2001.
More generally, broad demographic trends are restraining labor-force and employment growth in this expansion relative to prior post-war cycles, and there's little reason to interpret the current pace of job growth as inexplicably "sub-par." The passage of the Baby Boom and boomlet into the labor force added to employment growth during the 1970s and '80s, as did the ongoing entry of women to the labor force and rapid immigration growth.
The exit of baby boomers from the labor pool results in a slower pace of labor-force growth relative to the growth rate for the population. Reduced immigration growth is also a likely contributing factor.
With hindsight, it's unlikely that this expansion could have supported job creation much in excess of the current 150,000 to 200,000 growth path. In fact, the unemployment rate is trending downward in this cycle at the same pace as in past cycles. Ongoing labor-market strength will probably keep the Federal Reserve in tightening mode through at least yearend, given the momentum in the economy.
MacDonald is director of global research investment and analysis for Action Economics