Labour market recovery slowing - Capital Economics
US Economics

Labour market recovery slowing

US Employment Report Preview
Written by Andrew Hunter
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We estimate that non-farm payroll employment rose by “only” 1.0 million in July, as the renewed spread of the virus started to weigh on the economy. With employment currently still 15 million below its February level, that would underline that there is a long way to go in the economic recovery.

We estimate that non-farm payroll employment rose by “only” 1.0 million in July, as the renewed spread of the virus started to weigh on the economy. With employment currently still 15 million below its February level, that would underline that there is a long way to go in the economic recovery.

Since the 4.8 million surge in payrolls in June – which had raised hopes that the economy was in the midst of a V-shaped rebound – a range of indicators have suggested that the pace of recovery in employment and broader economic activity has slowed. While that can probably be explained by several factors, including the fading of the boost from the $1,200 stimulus cheques and from the initial wave of PPP loans being forgiven, the key factor seems to have been the renewed wave of coronavirus infections across the South and West, which has prompted several states including Texas, Florida and California to reimpose restrictions on bars, restaurants and other indoor activities.

Attracting the most concern has been the Census Bureau’s Household Pulse survey of employment which, after rising by 5.5 million between the May and June payroll survey weeks – not far from the official gain in payrolls over that time – has plummeted back by nearly 7 million between the June and July reference weeks. (See Chart 1.)

Chart 1: CB Household Pulse Employment (Mn)

Source: Census Bureau

A renewed drop back in employment would send shockwaves through the markets, but it is worth taking that “experimental” survey with a pinch of salt, not least because it has been running for just 11 weeks. It also isn’t seasonally adjusted, with employment usually dropping back at the start of the summer as workers in education and related sectors are laid off. In any case, while other indicators also point to a slowdown in employment growth, they don’t yet suggest the recovery has gone into reverse.

Data published by Homebase suggest that hours worked at small businesses have levelled off in recent weeks, but were still higher on average in July than they were in June. The employment indices of the Markit PMIs also saw a further increase this month, with the services measure edging back above the 50 mark. (See Chart 2.) Meanwhile, although the jobless claims data haven’t proved a particularly useful guide to employment in recent months, which partly reflects states struggling to clear backlogs of applications, the number of continuing claims has fallen by 2 million since the June payroll survey.

Chart 2: Markit Employment PMIs

Source: Markit

Overall, we expect employment growth to have slowed sharply in July, but to still show a further improvement, with non-farm payrolls rising by 1.0 million. The fall in the unemployment rate was probably more gradual as workers who temporarily left the labour force in March and April continued to go straight back to work – we anticipate a drop to 10.7%, from 11.1%. We still expect further gradual improvements over the coming months, with the unemployment rate falling to 8% by year-end, but the recovery from here is unlikely to be as smooth.

Table 1: Employment Data

Labour Market Indicators

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul1

Implication for Payroll Growth

Jobless Claims (Monthly Ave.)

226

213

214

2,667

5,040

2,608

1,499

1,369

Better

Jobless Claims (for week including the 12th)

229

220

215

282

4,442

2,446

1,540

1,416

Better

Challenger Job Cut Announcements (SA)

39.6

57.3

52.1

215.0

705.2

384.9

187.5

Better

Job Openings Rate

4.1

4.4

4.4

3.8

3.7

3.9

Better

Markit Manufacturing Employment Index

51.4

51.1

50.5

47.5

37.7

38.0

47.6

49.8

Better

Markit Services Employment Index

51.7

51.8

51.0

47.7

37.4

37.8

48.1

50.2

Better

ADP Private Payroll Employment Survey

167

205

147

-302

-19,409

3,065

2,369

Worse

CE Estimated Change in Non-Farm Payrolls2

186

223

241

95

-22,500

-9,000

5,000

1,000

Consensus Forecast for Non-Farm Payrolls

164

160

175

-100

-4,250

-8,000

3,000

2,260

Actual Change in Non-Farm Payrolls

184

214

251

-1373

-20,787

2,699

4,800

Actual Change in Private Payrolls

164

179

220

-1356

-19,835

3,232

4,767

Consensus Forecast

Other Employment Report Data

Unemployment Rate (%)

3.5

3.6

3.5

4.4

14.7

13.3

11.1

10.7

10.3

Change in Household Employment

267

-89

45

-2,987

-22,369

3,839

4,940

All Employees Hours Worked

34.3

34.3

34.4

34.1

34.2

34.7

34.5

34.4

34.4

All Employees Ave. Hourly Earnings (%m/m)

0.1

0.2

0.3

0.6

4.7

-1.0

-1.2

-0.5

-0.9

All Employees Ave. Hourly Earnings (%y/y)

3.0

3.1

3.0

3.4

8.0

6.6

5.0

4.2

3.8

Sources: Refinitiv, Markit, Capital Economics

1Figures in blue are forecasts 2Based on the CE dynamic factor model. The model has a MSE of 41,000 and beats the consensus forecast 65% of the time.

Chart 3: Actual & Estimated Change in Non-Farm Payrolls (000s)

Sources: Refinitiv, Capital Economics


Andrew Hunter, Senior US Economist, andrew.hunter@capitaleconomics.com