Wednesday, June 2, 2010

Jobs: It's Not Just Census Hiring!

Rick MacDonald, director of investment research and analysis for Action Economics, writes in Bloomberg Businessweek, Jobs: Will a May Surge Be Followed by a June Slump?:

Action Economics expects U.S. nonfarm payrolls to surge by 480,000 in the government's May employment report, scheduled for release on June 4, with a hefty boost of 420,000 from Census hiring and a 400,000 rise for government payrolls, alongside an 80,000 rise in private payrolls—the fifth straight monthly increase—that would come in below the surprisingly large 231,000 increase in April and the 174,000 gain in March.

We also expect the jobless rate to moderate to 9.8 percent from the surprising pop to 9.9 percent in April, while the average workweek holds at 34.1 hours and average hourly earnings post a 0.1 percent gain.

The industry mix should reveal the 400,000 surge in government hiring mentioned earlier, alongside a 10,000 rise in goods-producing employment that includes a 20,000 gain in factory employment, and a 70,000 gain in service-sector jobs excluding government. Though construction employment has risen in each of the previous two months, the gains may reflect the boost in April housing-sector activity spurred by the Apr. 30 expiration of the home buyers' tax credit, and could prove temporary.

Census Hiring Outlook

For 2010 Census hirings overall, we assume that the contribution to government employment will climb to a cumulative peak of 574,000 by May, which would be just above the 530,000 seen in May 2000 and well above the 335,000 seen in May 1990. The climb to a May peak should be quickly reversed by yearend, and generally hiring levels fall by nearly half in June and a little more than half by July. Given an assumed 250,000 drop in Census hirings in June, the next payroll figure after the May report should reverse into negative territory; our estimate calls for a 100,000 decline in payrolls in June, which will toss some cold water on enthusiasm associated with the May increase.

Here is a look at some of the other data that Action Economics has factored into its forecast:

The ADP survey of private-sector employment scheduled for release on June 3 is expected to reveal a 40,000 May gain, following a 32,000 April increase that is poised for upward revision toward the 231,000 private-payroll gain in the government's April jobs report. The 19,000 March figure should also be revised toward the 174,000 March private-payroll gain. The ADP industry breakdown should reveal a flat May figure for jobs among goods producers with a 20,000 factory job gain, while the service employment increase should largely match the headline gain.

The weekly initial jobless claims figures for May provide the greatest source of downside risk for payrolls. Initial claims have averaged a surprisingly lofty 459,000 thus far in May, vs. readings of 460,000 in April and 450,000 in March, and prior averages of 468,000 in February and 478,000 in January. Overall, the downtrend in initial claims has flattened out since early February, alongside a flattening downtrend in continuing claims as well, and the levels of these measures suggest that private-payroll growth is stalling around the zero area despite payroll gains over the last few months.

Other Indicators Weak

Other labor-market indicators have been weak in May. The employment components of the available factory sentiment reports have shown a pattern of mostly declines for May, which is consistent with our assumption that private-payroll growth may have been overstated in the last two monthly payroll reports. In contrast, most consumer-confidence measures edged up on the month, but at levels that remain deep in recession territory.

Overall, the May payroll report should benefit from a hefty Census boost, though beyond this distortion the labor market continues to mend only slowly, and we assume that a lean May private-payroll gain will reverse some of the enthusiasm following the surprisingly large private-payroll gains in March and April. We have yet to see the degree to which the resumption of positive gross domestic product growth will start to accelerate to the higher growth rates usually seen in the early years of expansions. The fuel for the current boost to the U.S. economy—lean manufacturer inventories—may run dry before GDP growth has accelerated to rates that will allow a sustainable jobless rate downtrend.

The May jobs report will be given a positive spin in the media given the big surge in Census hirings, but payrolls are poised for a Census-led decline in June that could top 100,000 if we don't see a sustained climb in the pace of private-sector job creation.

I respectfully disagree with Mr. MacDonald's assesment of the US jobs market. Please consider the following factors which argue in favor of massive payrolls (way over 500,000) this Friday:

1) ISM Report: "The manufacturing sector grew for the 10th consecutive month during May. The rate of growth as indicated by the PMI is driven by continued strength in new orders and production. Employment continues to grow as manufacturers have added to payrolls for six consecutive months. The recovery continues to broaden as 16 of 18 industries report growth. There are a number of reports, particularly in the tech sector, of shortages of components; this is the result of excessive inventory de-stocking during the downturn."

2) Payrolls May Underestimate U.S. Jobs as Household Survey Surges:In the first four months of the year, the adjusted household data shows employment grew by 1.67 million, almost three times the 573,000 increase in payrolls. At turning points in the economy, the former may prove more accurate because it’s more likely to pick up hiring at small companies and new firms that may be under the government’s radar.

“The household survey is actually more reliable than the payroll survey as long as you have several months to confirm the trend,” said Christopher Low, chief economist at FTN Financial in New York. “And we do.”

The jump in household employment may explain why consumer spending in the first quarter rose by the most in three years. It may also be one reason why federal tax collections are climbing as much as they are, Morgan Stanley economists David Greenlaw and Ted Wieseman said in a note to clients today. The Treasury has pulled in $303.3 billion in income tax receipts from the start of the fiscal year in October through May 5, up from $280.1 billion in the same time last year.

3) Real exports & real imports are surging:Real exports of goods and services increased 7.2 percent in the first quarter, compared with an increase of 22.8 percent in the fourth. Real imports of goods and services increased 10.4 percent, compared with an increase of 15.8 percent.

4) Profits surged in Q1 2010: Profits before tax increased $180.9 billion in the first quarter, compared with an increase of $137.0 billion in the fourth quarter.

But the key for Friday is point #2. Importantly, at turning points, household survey leads the payrolls survey. Stefane Marion, Chief Economist at the National Bank of Canada made this point the last jobs report in a NBF Hot Chart, US payrolls playing catch-up to household jobs (see chart above):

Labour markets surprised on the upside in April with the creation of 290,000 payroll jobs, the best showing in almost four years. Impressively, the private sector accounted for most of the improvement with a 231,000 addition to headcounts. We also note that job creation in the previous two months was revised up by a cumulative 121,000. Upward revisions are becoming larger, a situation that is likely to persist. We have argued many times before that at the start of an economic recovery, the establishment survey tends to understate job creation. This is what is happening again. As today’s Hot Chart shows, the Household survey (from which the unemployment rate is derived) is depicting a much bigger improvement in job creation that suggested by the payroll survey.

According to this methodology, which by the way is used in Canada to derive employment gains, shows the creation of close to two million jobs since the start of the year (+550,000 in April alone). We expect payroll jobs to continue to play catch-up to the household survey in the coming months with more upward revisions (provided that credit markets do not deteriorate).

Fundamentals have been improving for quite some time. I expect significant gains in full-time jobs in the private sector and a strong pickup in manufacturing jobs, many of which will come from the auto sector benefiting from the pickup in car sales.

Bottom-line: You can read all the bears in the world, focus on events in Europe (which are bullish long-term, but nobody bothers to mention this), focus on the BP disaster, focus on every piece of negative data in the world, but the reality is that the US economic recovery is picking up steam. Expect a monster jobs report this Friday, and it's not just a one-off from Census hiring!

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