The long road back - Capital Economics
US Economics

The long road back

US Employment Report Preview
Written by Michael Pearce
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We estimate that non-farm payroll employment increased by five million in June, as more furloughed employees returned to work. That would be another encouraging sign of the strength of the initial recovery, but would still leave employment 10% below February levels.

We estimate that non-farm payroll employment increased by five million in June, as more furloughed employees returned to work. That would be another encouraging sign of the strength of the initial recovery, but would still leave employment 10% below February levels.

The May employment report, which showed a surprise 2.5m gain, against the consensus expectation for a 7.5m decline, suggested that the rebound in activity and rehiring began sooner and stronger than we anticipated.

In hindsight, we and other forecasts last month put too much weight on the jobless claims figures, which continue to point to only a limited improvement in labour market conditions, with 1.5m new claims still being filed each week, and the continuing claims data showing that insured unemployment has fallen by just 1.3m since the May survey week. (See Chart 1.) With the rise in employment backed up by the stronger than expected rebound in retail spending in May, it now looks like the more generous benefits on offer convinced a much bigger share than normal of people who are eligible for the payments to apply.

Chart 1: Initial & Continuing Jobless Claims (Mn)

Source: Refinitiv

As a result, we are inclined to put more weight on high frequency indicators, which suggest that the recovery in activity continued to gather pace into mid-June. The footfall data and OpenTable restaurant diner numbers in particular began to pick up in the second half of May and first half of June. Renewed fears of the virus, as infections surged across the south and west, only really intensified after the June employment report survey week, so are unlikely to have much effect. The early survey evidence, including the employment sub-indices of the Markit PMIs, also rose sharply in June, suggesting that the rehiring trend has gathered pace.

All of that points to a much larger gain in payrolls in June than in May. A recent paper by Fed Board staff based on weekly private ADP payroll data through end-May (sadly not available to the public), give us some clue about the potential size of that rebound. Their estimates would be consistent with a monthly gain of around five million in payrolls.

We expect most of those gains were concentrated in the hardest hit sectors like food services, but manufacturing payrolls should also post a strong rise, as many auto plants only reopened in the second half of May. The one sector that struggled last month was government, where payrolls fell by 585,000. But a large chunk of that was due to a 373,000 drop in State & local education employment. Employment in that sector always falls during the summer holidays, but the lockdowns have meant that shift has happened earlier this year. Somewhat perversely, that means the seasonally adjusted figures could show a rise in teacher hiring over the next few months.

A five million rise in the household measure of employment would typically be enough to bring the unemployment rate down to 10%, but we expect another big rise in the labour force, reversing more of the slump seen in March and April. That should limit the decline in the headline unemployment rate to 11.5%. With job gains concentrated in low wage industries, average hourly earnings will fall back sharply again. Based on the ADP data, the Fed staff estimated that wage increases for most workers had stopped, but that only a small fraction of workers were seeing wage cuts. This suggests that underlying wage growth has weakened, but is not plunging.

Table 1: Employment Data

Labour Market Indicators

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun1

Implication for Payroll Growth

Jobless Claims (Monthly Ave.)

215

217

226

213

214

2,667

5,040

2,608

1,529

Better

Jobless Claims (for week including the 12th)

218

223

229

220

215

282

4,442

2,446

1,540

Better

Challenger Job Cut Announcements (SA)

52.6

44.5

39.6

57.3

52.1

215.0

705.2

384.9

Better

Job Openings Rate

4.6

4.3

4.1

4.4

4.4

3.8

3.7

Worse

Markit Manufacturing Employment Index

51.3

52.7

51.4

51.1

50.5

47.5

37.7

38.0

47.6

Better

Markit Services Employment Index

47.5

50.5

51.7

51.8

51.0

47.7

37.4

37.8

48.1

Better

ADP Private Payroll Employment Survey

73

161

167

205

147

-302

-19,557

-2,760

Better

CE Estimated Change in Non-Farm Payrolls2

178

201

186

223

241

95

-22,500

-9,000

+5,000

Consensus Forecast for Non-Farm Payrolls

89

180

164

160

175

-100

-4,250

-8,000

+3,000

Actual Change in Non-Farm Payrolls

185

261

184

214

251

-1,373

-20,687

2,509

Actual Change in Private Payrolls

190

247

164

179

220

-1,356

-19,724

3,094

Consensus Forecast

Other Employment Report Data

Unemployment Rate (%)

3.6

3.5

3.5

3.6

3.5

4.4

14.7

13.3

11.5

12.2

Change in Household Employment

246

-8

267

-89

45

-2,987

-22,369

3,839

All Employees Hours Worked

34.4

34.3

34.3

34.3

34.4

34.1

34.2

34.7

34.5

34.5

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

0.3

0.4

0.1

0.2

0.3

0.6

4.7

-1.0

-2.0

-0.8

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

3.2

3.3

3.0

3.1

3.0

3.4

8.0

6.7

4.3

5.6

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

Sources: Refinitiv, Capital Economics


Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com