Job Creation Gets Back to Work
By Michael Englund and Rick MacDonald
Was June's weaker-than-anticipated employment report an aberration -- or a signal that the strength in job creation displayed thus far in 2004 is starting to fade? We at Action Economics think that the data for July, scheduled for release Aug. 6, will suggest that job growth remains solid, though likely below the rapid pace seen in March through May. We expect July non-farm payrolls to rise by 200,000, which is below the Wall Street median forecast of a 225,000 gain.
How might financial markets react to the report? Wall Street will gauge its strength -- or weakness -- to evaluate the extent to which the surprising softness in June was temporary. We expect that it was, and this will imply a solid underlying economic growth trend. The Federal Reserve will keep a close eye on the numbers as well, and we think the July report should keep the Fed firmly on its tightening trajectory.
SEASONAL FACTORS IN PLAY?
Looking at other key components of the July report, we expect the unemployment rate to hold at 5.6%, which is in line with Street expectations. The average workweek should rebound to 33.8 hours, from the anomalous drop to 33.6 in June. Average hourly earnings should rise 0.2%. Overall, data in line with our forecasts would support another solid round of monthly economic figures.
Trends in U.S. employment were all thrown into question with the June data, which sharply reversed many patterns of the prior four months. Headline payroll growth slowed, with the small 112,000 gain for the month. The drop in the workweek back to its cyclical low of 33.6 was dramatic, and there were declines in most major components, including the factory data. The small 0.1% wage gain in June also removed the momentum of prior monthly increases and left a sideways pattern in wage growth once again.
Three events in particular may have depressed the June data. The first was President Reagan's funeral, which was held on the Friday of the survey period. Second, the survey week for June was at the earliest point possible on the calendar following the latest possible date for the Memorial Day holiday, which implies that seasonal factors may have been too aggressive. (On a non-seasonally adjusted basis, payrolls rose a hefty 484,000 on the month.) And third, weather was unusually cool in June, which may have held back more seasonally influenced businesses.
POSSIBLE HIRING UPSIDE.
To the extent that these factors depressed the June report, we should see an offsetting snap-back in July. As such, the degree of strength in July will help to provide a much better gauge of the labor market's underlying strength.
As for the factory sector, the strength in the employment component of two recent manufacturing gauges -- the New York Fed index and Philadelphia Fed index -- suggests some upside for factory payrolls following the disappointing 11,000 drop in June. We forecast a rebound of 40,000 jobs.
Englund is chief economist, and MacDonald director of investment research and analysis, for Action Economics