by Calculated Risk on 7/05/2012 01:10:00 PM

With only 77,000 payroll jobs added in April, and just 69,000 in May - and evidence that the economy slowed further in June - the June employment report to be released tomorrow is especially important. Another weak report, combined with sluggish Q2 GDP numbers to be released later this month, would increase the likelihood of QE3 being announced on August 1st.

However the weak payroll numbers for the last two months might have been "payback" for the mild weather in January and February. And not all is bleak. Vehicle sales were solid in June, and the sluggish recovery in housing is ongoing.

Bloomberg is showing the consensus is for an increase of 90,000 payroll jobs in June, and for the unemployment rate to remain unchanged at 8.2%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 176,000 private sector payroll jobs in June. This would seem to suggest that the consensus for the increase in total payroll employment is too low, although the ADP report hasn't been very useful in predicting the BLS report for any one month. Also, ADP doesn't include government payrolls, and government payrolls have been shrinking for some time.

• The ISM manufacturing employment index decreased slightly in June to 56.6%, down from 56.9% in May. A historical correlation between the ISM index and the BLS employment report for manufacturing, suggests that private sector BLS reported payroll jobs for manufacturing increased about 16,000 in June.

The ISM service employment index increased in June to 52.3%, up from 50.8% in May. Based on a historical correlation between the ISM non-manufacturing employment index and the BLS employment report for service, this reading suggests the gain of around 120,000 private payroll jobs for services in June.

Combined the ISM surveys suggest an employment report above the consensus.

• Initial weekly unemployment claims averaged about 385,000 in June, up slightly from the 380,000 average for April and May. This was the highest average this year, and about the same level as in November and December of last year when the economy added 190,000 jobs per month.

For the BLS reference week (includes the 12th of the month), initial claims were at 392,000; the highest this year.

• The final June Reuters / University of Michigan consumer sentiment index declined to 73.2, down from the May reading of 79.3. This is frequently coincident with changes in the labor market, but also strongly related to gasoline prices and other factors. Gasoline prices have been falling, so this decline suggests a weaker labor market.

• The small business index from Intuit showed 70,000 payroll jobs added, up from 40,000 in May.

• And on the unemployment rate from Gallup: U.S. Unadjusted Unemployment Unchanged in June

U.S. unemployment, as measured by Gallup without seasonal adjustment, was 8.0% in June, unchanged from May, but significantly better than the 8.7% from a year ago. Gallup's seasonally adjusted number, based on applying an estimate of the government's June adjustment, is 7.8%, an improvement from 8.3% in May, and down considerably from 8.5% in June 2011. Both the unadjusted and the adjusted numbers are at least tied for the lowest Gallup has recorded since it began collecting employment data in 2010.

Note: Gallup only recently has been providing a seasonally adjusted estimate for the unemployment rate, so use with caution (Gallup provides some caveats). Note: So far the Gallup numbers haven't been useful in predicting the BLS unemployment rate.

• Conclusion: The overall feeling is that the economy weakened further in June, and that would seem to suggest another weak employment report this month. However, if the "payback" is over (as several analysts have argued), the number of payroll jobs could be better than the last couple of months.

Recently I've taken the "under" on the employment report, but looking at these data points surprised me a little. The combined ISM reports suggest a number in the 130,000+ range, and the ADP report (private only), suggest the consensus is too low. And the Intuit numbers improved sharply. Note: The ISM survey is conducted all month, with most respondents replying at the end of the month - so the timing doesn't line up with the BLS reference week.

On the negative side, weekly claims increased in June to the highest level this year, and consumer sentiment declined - even with falling gasoline prices.

There always seems to be some randomness to the employment report, but this month I'll take the over (over 90,000 payroll jobs).

For the economic contest in July:

by Calculated Risk on 7/05/2012 10:07:00 AM

The June ISM Non-manufacturing index was at 52.1%, down from 53.7% in May. The employment index increased in June to 52.3%, up from 50.8% in May. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: May 2012 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in June for the 30th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI registered 52.1 percent in June, 1.6 percentage points lower than the 53.7 percent registered in May. This indicates continued growth this month at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 3.9 percentage points lower than the 55.6 percent reported in May, reflecting growth for the 35th consecutive month. The New Orders Index decreased by 2.2 percentage points to 53.3 percent, and the Employment Index increased by 1.5 percentage points to 52.3 percent, indicating continued growth in employment at a faster rate. The Prices Index decreased 0.9 percentage point to 48.9 percent, indicating lower month-over-month prices for the second consecutive month. According to the NMI, 12 non-manufacturing industries reported growth in June. Respondents' comments are mixed and vary by industry and company."

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was below the consensus forecast of 53.0% and indicates slower expansion in June than in May.

by Calculated Risk on 7/05/2012 08:37:00 AM

The DOL reports:

In the week ending June 30, the advance figure for seasonally adjusted initial claims was 374,000, a decrease of 14,000 from the previous week's revised figure of 388,000. The 4-week moving average was 385,750, a decrease of 1,500 from the previous week's revised average of 387,250.

The previous week was revised up from 386,000 to 388,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined slightly to 385,750.

This is just off the high for the year.

And here is a long term graph of weekly claims:

This was below the consensus forecast of 386,000. This is just one week of improvement, and the four week average suggests some renewed weakness in the labor market.

All current Employment Graphs

by Calculated Risk on 7/05/2012 08:20:00 AM

ADP reports:

According to today‟s ADP National Employment Report, employment in the nonfarm private business sector rose 176,000 from May to June on a seasonally adjusted basis. Employment in the private, service-providing sector rose 160,000 in June, after rising a revised 137,000 in May.

According to Joel Prakken, chairman of Macroeconomic Advisers, LLC, “The gain in private employment is strong enough to suggest that the national unemployment rate may have declined in June. Today‟s estimate, if reinforced by a comparable reading on employment from the Bureau of Labor Statistics tomorrow, likely will ease concerns that the economy is heading into a downturn.”

Prakken added: “There seems little doubt that recent employment gains have been restrained by heightened uncertainty over the European financial crisis and by growing concerns about domestic fiscal policy. However, the acceleration of employment since April does lend credence to the argument that unseasonably warm weather boosted employment during the winter months, with a "payback" spread over April and May.”

This was way above the consensus forecast of an increase of 95,000 private sector jobs in June. The BLS reports on Friday, and the consensus is for an increase of 90,000 payroll jobs in June, on a seasonally adjusted (SA) basis.

ADP hasn't been very useful in predicting the BLS report, but this suggests a stronger than consensus report.

Note - it was rate cutting day too: ECB cuts rates.

China cuts rates.

BOE expands QE.

by Calculated Risk on 7/05/2012 07:00:00 AM

From the MBA: Mortgage Applications Decrease Driven by a Drop in Refinances in Latest MBA Weekly Survey

The Refinance Index was down about 8 percent overall this week, largely driven by a significant drop in refinance applications for government loans. The HARP 2.0 share of refinance applications has been 24 percent over the past two weeks, up slightly from 20 percent three weeks ago. The seasonally adjusted Purchase Index increased less than 1 percent from one week earlier.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.86 percent from 3.88 percent, with points increasing to 0.41 from 0.40 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the lowest 30-year fixed rate since MBA began tracking the series.

Click on graph for larger image.

The decline in refinance activity was from a very high level. This just offset the surge in refinance activity two weeks ago related to the change in FHA streamline refinancing.

The purchase index is mostly moving sideways.