Jobless Recovery? Not Any Longer

May's employment report seems certain to bring more good news of solid hiring -- news that may well spur the Fed to begin raising rates

By Michael Englund and Rick MacDonald

The May employment report, scheduled for release June 4, should show that the "jobless recovery" is now nothing more than an unpleasant memory. We at Action Economics expect nonfarm payrolls to rise 225,000 on the month, which is right in line with the Wall Street consensus forecast. We expect the unemployment rate to hold at 5.6%, also in line with the consensus.

The rise in payrolls should fall short of April's hefty gain of 288,000 -- and the shocking surge of 337,000 (as revised) in March. But the May data, along with other recent reports, should point to continued improvement in the labor market. As such, it should provide more ammunition for the Federal Reserve to begin tightening monetary policy at its June 30 meeting, if Alan Greenspan & Co. is so disposed.

While there's some risk that we will see "payback" in the upcoming report for the jump in payrolls over the last two months, the data for May should further confirm the steady improvement in the labor market. Based on our projection of a 225,000 gain in payrolls in May, the average pace of monthly nonfarm payroll growth in 2004 should be a solid 219,000.


  As for the other key components of the May report: The workweek figures for the factory sector should rebound from a pause in April, allowing the overall workweek to resume its uptrend and rise to 33.8 hours, from 33.7 in April. Average hourly earnings should increase 0.2%, which is also in line with the consensus forecast.

One particular component of the report will come in for close scrutiny in this election season: factory employment. Manufacturing jobs should rise by a hefty 45,000 in May, marking the fourth consecutive gain following 42 months of declines. This projected increase is well in excess of the consensus forecast of a 20,000 gain.

In our view, several months of robust growth in manufacturing have constrained resources to the point that factories are forced to make new hires. This has been clear over the last three months, with factory payrolls increasing 21,000 in April, following gains of 7,000 in February and 9,000 in March.


  And May is likely to see a big acceleration in manufacturing job growth. One signal: The employment component of the Institute for Supply Management's survey of the manufacturing sector for May rose to its highest level since April, 1973. Such a level has historically been consistent with factory payroll growth of around 100,000. This not only suggests upside risk for factory payrolls for May, but also that payroll trends for the economy overall should be strong.

The strength in payrolls over March and April has left the market pricing in a 25 basis point (one-quarter percent) tightening in the benchmark Fed funds target rate at its June meeting, to 1.25%. Jobs data in line with our forecast would not shift those expectations. The real question will be how Federal Reserve officials characterize the figures afterward, thereby indicating its comfort with the market's perception that a June tightening is highly likely.

For out part, while we acknowledge the risk of a rate hike next month is high, we don't believe it's necessarily a done deal. We'll keep a watch on the May jobs report, and possibly the May Consumer Price Index (CPI) release on June 15. Weaker than expected data from those reports would certainly give the Fed an excuse to remain on the sidelines. What the Fed's decision will probably boil down to, however, is timing. This is indeed a "sooner or later" choice for Greenspan, hinging on whether he wants to get the move out of the way before the the fall's hotly contested Presidential elections.

Englund is chief economist and MacDonald director of investment research and analysis for Action Economics

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