Thursday, June 02, 2011

Employment Situation Preview: Fewer Payroll Jobs Added, Grim Overall

by Bill McBride on 6/02/2011 11:30:00 AM

Tomorrow the BLS will release the May Employment Situation Summary at 8:30 AM ET. As I noted in the weekly schedule, the consensus forecast for payroll jobs seems too high; Bloomberg is showing the consensus is for an increase of 190,000 payroll jobs in May, and for the unemployment rate to decline to 8.9%.

Of course many analysts have reduced their forecasts this week based on the ISM manufacturing survey and the ADP employment report. As an example, in a note last night, Goldman chief economist Jan Hatzius wrote:

"We have lowered our forecast for nonfarm payroll growth in May to +100,000 from +150,000 previously. This shift is a direct response to the downbeat data so far this week, including big disappointments in the ADP report on private-sector employment, the ISM manufacturing survey, and the Conference Board's consumer confidence index. Our forecasts for the unemployment rate and average hourly earnings remain unchanged at 8.9% and +0.2%, respectively."
Here is a summary of recent data:

• The ADP employment report (private sector only) showed an increase of only 38,000 payroll jobs in May. This was significant below the 194 thousand per month average for the first four months of the year.

Initial weekly unemployment claims have averaged 425,500 per week in May, about the same as in December 2010 and January 2011. The BLS reported an average of just over 100 thousand payroll jobs added during those two months (although there were some weather issues in January).

• The ISM manufacturing index slowed sharply in May, however the Institute for Supply Management noted: "Manufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2 percent, which is 4.5 percentage points lower than the 62.7 percent reported in April." This suggests manufacturers were still expanding their payrolls in May (the regional manufacturing surveys also showed payroll expansion).

A few examples of regional reports: The Chicago PMI reported: "Breadth of EMPLOYMENT expansion softened but remained strong." The employment index decreased to a still strong 60.8 from 63.7 (above 50 is expansion). And the Philly Fed reported: "Firms’ responses continue to indicate overall improvement in the labor market despite weaker activity ..." and the Empire State survey showed "The index for number of employees inched up to 24.7, indicating that employment levels expanded over the month, and the average workweek index rose thirteen points to 23.7, a multi-year high." (above 0 is expansion).

So even as activity slowed, manufacturers continued to hire. This suggests that many manufacturers believe the slowdown is temporary.

Consumer Sentiment• The final May Reuters / University of Michigan consumer sentiment index increased to 74.3 from the preliminary reading of 72.4, and from 69.8 in April. This is frequently coincident with improvements in the labor market - but also strongly related to gasoline prices (Gasoline was probably the reason for the slight improvement in May).

• And on the unemployment rate from Gallup: U.S. Unemployment Stagnant in May
Unemployment, as measured by Gallup without seasonal adjustment, stood at 9.2% at the end of May -- unchanged from mid-May and down slightly from 9.4% at the end of April. It is also slightly lower than it was at the same time last year (9.5%).
NOTE: The Gallup poll results are Not Seasonally Adjusted (NSA), so use with caution. This suggests the unemployment rate will be about the same or decline slightly in May.

• Even if the payroll report shows improvement, the employment situation remains grim. There are 6.955 million fewer payroll jobs now than before the recession started in 2007 with 13.7 million Americans currently unemployed. Another 8.6 million are working part time for economic reasons, and about 4 million more workers have left the labor force. And 5.84 million have been unemployed for six months or more. Numbers to remember.

• Oh, one thing is for sure, some commentators will incorrectly use the BLS birth/death model!

Obviously the economy slowed in May, and the employment report will most likely reflect this slowdown. I expect something close to 100 thousand payroll jobs.

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