Jobs: The Slump Stretches into Summer

The U.S. labor market likely remained in the doldrums in July. The government's employment report for the month, scheduled for release Aug. 1, looks poised to extend the patterns of the first half of the year.

Both Action Economics' own forecasts and the median forecasts of economists imply a near-repeat of the June nonfarm payroll figures. We expect nonfarm payrolls to fall 60,000 (vs. economists' median forecast of a 65,000 decline), while the unemployment rate holds at 5.5% (median 5.6%), average hourly earnings rise 0.3% (0.3%), and the average workweek is unchanged at 33.7 hours (median 33.7).

The mix of payrolls by industry should continue to show weakness led by goods-producing industries, with restrained gains in service sector employment.

Still Weak, but Little Further Deterioration

Looking at the other labor-market reports that inform our forecast, the ADP employment survey released July 30 revealed a 9,000 rise in private payrolls in July that signals some upside risk for the July employment report. But, given the enormous recent overperformance of the ADP figures relative to payrolls, the upside ADP surprise is hard to interpret.

The weekly initial jobless claims data and continuing claims figures have been affected by auto-industry retooling in July, though the four-week averages imply a sideways trend in job market conditions since June. The labor market is still in a weakened state relative to where it was before financial market turmoil began last August, but claims imply little further deterioration in recent months. Overall, the 50,000-60,000 rise in initial claims since the middle of last year is much smaller than the 100,000-150,000 rise that would normally be expected in a recession.

The Michigan consumer sentiment survey and the Conference Board's consumer confidence survey have both bounced in July, with gas prices finally subsiding following the record run in the first half of the year. The June Michigan survey dropped to the lowest level since May, 1980, while the June Conference Board survey dropped to the lowest level since March, 1992. Thus, the bounce in July still leaves this series at historically depressed readings that have only been seen previously in recession.

Other Employment Numbers Down

As such, these figures probably still suggest weakness in payrolls, as confidence declines historically are correlated with a weakening labor market. Soaring gasoline prices and recent declines in the stock market are likely the primary drivers of plummeting confidence in recent months.

The employment components from the various factory sentiment surveys have deteriorated further in July. The Empire State employees index came in at -6.3 from 1.2, while the workweek fell to -8.4 from -2.3. The Philly Fed employees index fell to -7.3 from -6.9, while the workweek fell to -12.5 from -8.9.

The Chicago purchasing managers' employment index will be released ahead of the July employment report on July 31, while the Institute for Supply Management employment index will be unveiled after the jobs report on Aug. 1. Of particular concern is the drop in the June nonmanufacturing ISM employment component to 43.8 from 48.7, which marks a new all-time low for the history of the series (dating back to July, 1997).

Expect the Fed to Keep It Steady

As for the impact on the Federal Reserve, the August jobs report should prove weak enough to prevent the central bank from significantly boosting its disproportionate focus on inflation risk at its Aug. 5 policy meeting, and we continue to expect policy to remain on hold through the November elections. Yet, the report should not be weak enough to prevent Fed inflation hawks from continuing to highlight inflation risks in public statements, leaving ongoing pressure on the FOMC to take back at least some of the recent jumbo easing moves at some point soon after November.

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