Job Growth Blooms Again in May
After a weaker than expected showing in April, Action Economics expects the May employment report, scheduled for release June 1, to reveal a rebound in job growth following the weather-restrained April figures. We expect non-farm payrolls to rise 135,000 in May (vs. economists' median forecast of 140,000) from a tepid gain of 88,000 in the prior month. This would extend the weather-led zig-zag pattern of 2007 job growth, around the widely expected pattern of gradual payroll growth moderation. Overall, the report is expected to show continued labor market tightness.
The unemployment rate is expected to hold at 4.5% (median 4.5%). The average work week is expected to rebound to 33.9 hours (median 33.8) from 33.8 hours. Hourly earnings are expected to increase 0.3% (median 0.3%), which should leave year-over-year earnings growth hovering near 4%.
A number of other recent data releases have helped shape our forecast. Recent weekly initial jobless claims reports suggest a May bounce in payroll growth, following the weak claims data around the April survey week that the Bureaus of Labor Statistics used to derive the month's payrolls number. The May BLS survey week reading was a very lean 296,000 vs. 341,000 for April, 318,000 in March, a weather-bloated 331,000 in February, and 287,000 in January. Initial claims have dropped sharply in May, with a projected month-average reading of 307,000 from 327,000 in April, 318,000 for March, 338,000 for February, and 306,000 for January.
The ADP Employment Survey for May showed a reading of 97,000, which translates to about a 125,000 gain in non-farm payrolls.
The University of Michigan consumer sentiment index and the Conference Board's consumer confidence index have both rebounded in May, which is all the more impressive given that gas prices have pushed through $3 per gallon. The Michigan index rose to 88.7 from 87.1 in April, while consumer confidence jumped to 108.0 from 106.3. Overall, confidence remains at historically solid levels that bode well for both the economy and job growth.
The employment components from the May factory sentiment surveys that have already been released have shown improvement on the month. The Empire State index employees index rose to 9.7 in May from 5.4 in April, while the work week jumped to 11.1 from 1.2. The Philadelphia Fed survey's employees' index increased to 12.9 from 2.5, although the work week fell to –5.5 from 5.5. Assuming solid figures from the employment components of both the Chicago purchasing managers' index and the Institute for Supply Management's manufacturing reports for May, the data are consistent with manufacturing employment's providing less of a drag on overall payroll growth this month.
Watching the Future
Meanwhile, wage growth on a year-over-year basis has risen substantially since the start of 2004, though a surge in year-over-year growth to a 4.3% cyclical peak in April of last year has been followed by a fairly sideways trend since then —with April this year actually slowing to 3.8% compared to last year's hefty pop. As long as labor markets remain tight, solid earnings growth will continue, and these gains should help to fuel consumer spending.
For now, momentum in the job market continues to provide support for consumption and gross domestic product forecasts despite the lingering effects of the ongoing inventory correction, though we do expect job growth to moderate through 2007. Even if we see signs of reduced payroll growth, however, the high year-over-year wage growth figures fueled by a generally low unemployment rate are likely to persist for the foreseeable future.
Of course, Federal Reserve policymakers will monitor the May jobs report for signs of weakness in the labor market—or, on the other side of the coin, additional upside pressure on wages. Strength in most of the recent economic releases and recent hawkish comments by Fed officials knock out notions of near-term rate cuts, lessening hopes for easing this year. We expect the Fed to remain sidelined until the autumn at least, and see tightening down the road if inflation fails to moderate and the economy picks up some steam.