Thursday, July 31, 2014

Preview: Employment Report for July

by Calculated Risk on 7/31/2014 02:31:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for July. The consensus, according to Bloomberg, is for an increase of 233,000 non-farm payroll jobs in July (range of estimates between 200,000 and 280,000), and for the unemployment rate to be unchanged at 6.1%.

Note: The BLS reported 288,000 payroll jobs added in June with the unemployment rate at 6.1%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 218,000 private sector payroll jobs in July. This was below expectations of 235,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth slightly below expectations.

• The ISM manufacturing and non-manufacturing employment indexes for July will be released after the employment report this month. The ADP report indicated a 3,000 increase for manufacturing jobs in July.

Although the ISM reports are not available, the regional manufacturing surveys were all positive on employment for July (even the disappointing Chicago PMI improved on employment).

Initial weekly unemployment claims averaged close to 302,000 in July, down from 316,000 in June. For the BLS reference week (includes the 12th of the month), initial claims were at 303,000; this was down from 314,000 during the reference week in June.

The lower reference week reading suggests some upside to the consensus forecast.

• The preliminary July Reuters / University of Michigan consumer sentiment index decreased to 81.3 from the June reading of 82.5. This is frequently coincident with changes in the labor market, but there are other factors too.

• On small business hiring: The small business index from Intuit showed a 15,000 increase in small business employment in July.  From Intuit:

U.S. small businesses added 15,000 jobs in July, bringing the number of new jobs added over the last six months to more than 90,000. While 610,000 jobs have been added since the small business recovery began in March 2010, small business employment remains 870,000 jobs below its peak in March 2007.
...
"This month's employment increase shows additional progress." said Susan Woodward, the economist who works with Intuit to create the indexes. "Things continue to get better, but slowly. The jobs added by small business over the most recent six months, including July, are more than double what we saw over the prior six months."
• A few comments from Merrill Lynch economists:
We look for nonfarm payrolls to increase 250,000 in July, a slight slowdown from the three-month average of 272,000. The unemployment rate will likely hold at 6.1% while average hourly earnings edge up a trend-like 0.2% mom. This will translate to a 2.2% yoy pace for wage growth. The wage data will be in focus – despite the continued notable drop in the unemployment rate, wage growth has remained lackluster. This suggests that there is indeed spare capacity in the labor market, which can be seen by the large number of discouraged and marginally attached workers. We should therefore continue to look at these broader measures of unemployment, which have improved but remain historically elevated.

The early indicators of the labor market look healthy: initial jobless claims continued to slide lower while the regional manufacturing surveys showed a pickup in hiring. Furthermore, the labor differential has been improving, falling to -17.1 in June — the best since the summer of 2008, when the recession was just getting underway. In particular, we look for private payrolls to be up 235,000 while government jobs expand by 15,000, driven by state and local hiring. Special focus will be construction and retail jobs — we think the risk is that construction hiring looks sluggish, in part due to seasonal adjustment issues. Retail job growth should improve, but may look soft relative to the recent trend.

Within the household survey, we look for some slowdown in household job growth after the strong 407,000 gain in June. However, we think job creation will still look strong in this more volatile survey. The labor force participation rate was little changed last month and we think the risk is that it inches up slightly; however, we have been surprised by the continued weak trend in participation. Hence, we wouldn’t be surprised if the unemployment rate fell by another tenth.
• Conclusion: The ADP report was lower in July than in June - and below forecasts - but still fairly solid.  Weekly unemployment claims were at the lowest level during the reference period in a number of years. However the Intuit small business index showed somewhat less hiring in July.

There is always some randomness to the employment report, but the I'll take the under on the consensus forecast of 233,000 nonfarm payrolls jobs added in July.