The first week of July could offer more than the usual incendiary fireworks this year. It might also offer some economic fireworks, as the Employment Situation Report reaches the wire for the month of June the day after Independence Day. What should we expect for this Friday's blockbuster data-point?
The first thing to look at when attempting to understand what the next employment report might look like is the last one. The Employment Situation Report for May showed an essentially unchanged unemployment rate at 7.6% and nonfarm payroll growth of 175K. My close inspection of the report revealed that the true unemployment rate could be as high as 11.7% and that underemployment was probably nearer to 17.6%.
It's because of the inadequate reporting of unemployment for those Americans who are either underemployed or have been unemployed for so long that they have fallen out of the labor participation pool. In other words, they are no longer included in the labor force count, even though many are ready and willing to work. This trend is sure to continue this month, given that the long-term unemployed (for 27 weeks or more) still amount to 37.3% of the total jobless count.
Suppose we buy into the version of the truth we are being fed in the pure government data. Well, in that case, we should be enthused by the ADP Private Employment Report for June, published Wednesday. ADP's figure is simply an estimate intended to predict what the government will report on the hiring patterns of corporate America two days later. In the time I have been following the data-point, I have noted that on occasion it can diverge significantly from the government data, though ADP has tweaked its model and continues to perfect it. I should note that while the two have diverged, I'm not sure which one if any is accurate.
For what it is worth, ADP indicated expectations for an increase of 188K private nonfarm payrolls in June. That was better than the economists' consensus estimate for +165K. Economists forecasting the government data estimate that the same figure will show +175K within the government's report. When two sets of consensus estimates for the same figure in different reports are different, it makes it hard to infer any information of value. Economists are estimating that overall nonfarm payrolls, including the public sector, will increase by just 161K. That implies the public sector will be an opposing force to job growth, which is consistent with my expectations. Considering that nonfarm payrolls ran at 175K last month, even if this figure is higher than expected, it might not be better than last month.
Weekly Jobless Claims data is of value here because the four-week moving average offers useful insight in the payrolls. The latest report, published Wednesday this week, showed the four-week moving average for jobless claims at 345,500, which was not much different than the latest week's flow rate (343K). This is an indicator that net job growth will probably be near to what it was last month, in my estimation.
Two important economic issues weigh against us. The Sequester spending cut issue, which was initially given little weight by those expecting the legislation to fail or to be reconsidered; the cuts are likely resulting in job losses now. Recently, the manufacturing sector has come under some pressure, with regional and national indicators indicating periods of economic contraction. More broadly speaking, ISM's Nonmanufacturing Index dipped a little too close to breakeven for comfort when it was reported on Wednesday. It represents 90% (service sector) or so of the American economy versus the goods producing segment.
In the past, bad news was good news and good news was bad news, because the Federal Reserve was always expected to ease if data showed it enough trouble. Today though, things have changed, and we are not sure what to expect from the Fed, especially given what it has said it is going to do. Stocks have been resilient, though they have faced recent tests. In this week's run-up to the Employment Report, stocks are indicating some confidence. Other factors are likely behind the moves of various asset classes. Oil is higher on the issues of Egypt and the threat posed to the Suez Canal. Gold is higher after having taken a beating and being oversold; it's now finding its mean valuation I expect and being remembered for its safe haven characteristics (as I see it). I'll have more to say on gold in a near-term focused piece.
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In conclusion, my educated guess is that continued bleeding from the labor pool could allow the unemployment rate to ease to 7.5%, as the consensus of economists sees it. Nonfarm payrolls may increase somewhere between the consensus expectation for 161K and last month's increase of 175K. My best guess here, based on the data discussed, would be for 171K. For further economic analysis and discussion, please feel free to follow my column here. We will have more to say on the labor market after the employment report is published.