Jobs: A Slowing Slowdown?

Action Economics expects a larger decline in payrolls in May, but encouraging news in other parts of the month's employment report

Could the worst of the U.S. labor-market slump be behind us? Nonfarm payrolls, as detailed in the government's monthly employment report, dropped by 76,000 to 80,000 in each of the first three months of 2008, but only fell by 20,000 in April. For our estimates, we expect nonfarm payrolls to fall by 60,000 in May, which is similar to the median forecast of market economists of a 50,000 decline.

While we expect the payrolls figure for the month to show a modest deterioration, the average workweek component of the report should offer some encouragement with a steady reading at 33.7 hours in May, vs. the 0.1-hour drop in April. This should leave a better tone for the report overall.

The rest of our estimates for the report, scheduled for release June 6, track the median forecasts of a bump in the unemployment rate to 5.1%, from the surprisingly lean 5.0% reading of April, and a 0.3% hourly-earnings gain that should leave the year-over-year rate bouncing to 3.4% from the surprising drop to 3.1% in April.

Other Labor Market Indicators

The mix of payrolls by industry should show ongoing weakness led by goods-producing industries, while job growth in the service sector remains restrained.

Looking at other labor-market indicators that could influence the May employment report, the May ADP payroll survey implies upside risk, given the 40,000 gain on the month, although this survey has outpaced payroll growth in the government report by an average of 104,000 per month over the last six months.

The ADP industry breakdown of a 37,000 jobs drop for May employment in goods-producing industries, with a 26,000 drop for factories, and a 77,000 service job gain, leaves a broad-based overshoot of these figures relative to most payroll estimates.

Surveys at New Lows

The weekly initial jobless claims data have settled into a narrow range of 365,000-374,000 over the last four weeks after rising through much of the first quarter, while continuing claims continue to drift higher—currently sitting at a four-year high. The mix implies the labor market is still in a weakened state relative to where it was before financial market turmoil began last August, but with little evidence that conditions are softening further. Overall, the 50,000-60,000 rise in initial claims since the middle of last year is much smaller than the 100,000-150,000 rise that would normally be expected in a recession.

The Michigan consumer sentiment survey and the Conference Board consumer confidence survey have both pushed to new lows in May. The Michigan survey has dropped to the lowest level since June, 1980, while the Conference Board survey has dropped to the lowest level since October, 1992. These figures suggest continued downside payroll risk on the month, as confidence declines historically are correlated with a weakening labor market, though soaring prices and the advent of $4-per-gallon gasoline are likely the primary drivers of plummeting confidence in recent months.

While the employment components from the various regional factory sentiment surveys have remained depressed in May, they have improved from recent lows.

In total, we expect a U.S. jobs report that shows a bigger payroll drop in May than seen in April, but with less of April's workweek deterioration. Though negative payroll figures continue to signal a weak economy, the numbers should extend the recent pattern of coming in ahead of recessionary levels—but offering little reason to become optimistic over the growth outlook. When it comes to recession, "no news is good news," and the markets will likely take the figures as suggesting that the worst of the U.S. economic news is behind us.

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