A Damp Month for Jobs
The pace of U.S. job growth may slow in May. For the government's employment report for the month, scheduled for release June 2, we at Action Economics have knocked down our estimate for nonfarm payrolls to only a 165,000 gain, from 185,000 previously, given recent indicators of payroll growth moderation in other recent economic reports. The May report should confirm the following:
• The labor market is solid, though payroll growth has consistently fallen short of forecasts.
• With many job growth indicators now dropping back from unusually high readings earlier in the year, risk from these measures lies to the downside.
• Seasonal factors typically account for big May job gains. Labor-market constraints and oil-price uncertainty could hold back the reported seasonally-adjusted gain. Weather won't be a factor on the month.
The recent pace of job creation hasn't lived up to market expectations. Payroll growth has averaged only 167,000 over the last five months. This compares to the average median forecast over the same period of 208,000 -- leaving an average shortfall of about 40,000. The "as-reported" figure has averaged a bit higher, at 179,000, leaving an average shortfall relative to the median of 29,000. The current May median forecast is a lean 180,000, and a shortfall from this pace would leave a less-than-stellar track for job growth .
On an industry basis, there was a surprisingly large 36,000 pullback in retail trade employment in April that accounted for much of the shortfall in payrolls relative to expectations. In the May report, the risk is that factory job growth slows and retail employment stabilizes, with similar-sized gains in other industries. The temporary-help component has been seen as a leading indicator for overall employment trends, and this series has fallen in three out of the first four months in 2006.
The civilian-employment measure, from the household survey, was surprisingly weak in April, rising only 47,000. Yet this followed much stronger figures over the previous four months -- with average growth over the five-month period at 215,000. While the household survey tends to be twice as volatile as the payroll survey, it's also less subject to substantial benchmark revisions. As such, the survey is closely followed at inflection points, and the May report will provide an important update.
The May 31 release of the May ADP Employment Survey signals private payroll job growth of 122,000. With our 25,000 forecast for the government payroll gain in May, this implies a 145,000 to 150,000 nonfarm payroll increase on the month.
Initial jobless claims revealed a notable jump through the May survey week, though the increase was entirely due to a partial government strike in Puerto Rico. The strike won't affect the payroll survey, however, and the "ex-strike" figure for the week from the Bureau of Labor Statistics' survey -- 314,000 -- was relatively lean. In addition, the continuing claims figures hit a new cyclical low at the start of the month, and have remained low since.
The employment components from the month's factory sentiment surveys suggest downside risk for manufacturing payroll growth in May, following the surprisingly strong 19,000 gain in April. The New York Fed employment index fell to 9.1 from 17.4. The May employees index from the Philadelphia Fed survey dropped to 1.1, from 21.7 in April. This marked the lowest reading since November, 2003, and this level has historically has been consistent with job losses in manufacturing payrolls.
The current conditions series from University of Michigan's Consumer Sentiment and the Conference Board's Consumer Confidence reports both declined in May, though the reading from the Conference Board remained at a remarkably high level. The Michigan data suggest downside risk for hiring on the month, as shown below, though the Conference Board data suggest risk to the upside.
The most recent Help-Wanted Index dropped to 35 in April, from March's 37 and February's 39. This marks the lowest reading since 1961. While this index has lost its value in recent years given the migration toward online job postings, the deterioration over the last two months is noteworthy. In addition, the Conference Board's Online Data Series fell 138,000, or 6%, in April, and is supportive of a slowdown in job growth.
While the headline nonfarm payrolls number draws the market's attention, the Federal Reserve may be focused on hourly earnings data in May, given lingering concerns about brewing inflation pressure and the central bank's looming decision on interest rates. The May employment report will be a key driver of the Fed outlook, with both the jobs and earnings data providing important inputs for the June 28-29 FOMC meeting.
One question for the Fed is whether the restrained job growth of recent months, and sharp upswing in wages, is a signal that the labor market is near capacity. This puts increased focus on the hourly earnings data, given lingering concerns about brewing inflation pressure. Indeed, hourly earnings jumped a hefty 0.5% in April, leaving the year-over-year rate spiking to 4.2% from 3.5% in March. This represents the highest rate since March, 2001.
With nervousness running high about interest rates, the May report could be key in setting expectations for the June FOMC meeting, and as such, could get a strong reaction in the market. We continue to believe the Fed will be able to pause in its series of consecutive rate hikes, though we will need to see signs that inflation isn't accelerating, and that economic growth is slowing.