Market Insider

Friday's Jobs Report: Forecast Is For More Disappointment


US private sector employers likely added about 100,000 jobs in the month of July, but a new round of state and local government layoffs may add new weight to the jobless rate.

Out of Work

Economists expect the loss of 65,000 non-farm payrolls and a slightly higher unemployment rate of 9.6 percent, when the July employment report is released at 8:30am ET Friday. Within that number, they expect to see the reduction of more than 100,000 temporary workers hired for the US census, but there may also be tens of thousands of new job losses among state and local government workers.

"We could get some surprises because we're starting to get the pink slips at the state and local level," said Diane Swonk, chief economist at Mesirow Financial. Swonk said there are estimates that local governments could furlough as many as 500,000 workers in the next two years.

Economists say this is the time of year, typically, when public school teachers are let go; and that number will be much larger than usual this year. The teachers will also be joined by other state and municipal workers, as local governments struggle with budget shortfalls.

Barclays Capital chief US economist Dean Maki expects to see 30,000 state and local government layoffs, but he also expects the private sector to add 125,000 workers. His estimate is for a total loss of 50,000 payrolls, including 145,000 from the decline in census workers.

"There is still a lot of caution among firms, and worries about whether this is going to be a sustainable recovery. As those concerns fade, we believe the numbers will be firming. We look for job growth in the fourth quarter of 150,000 in total and next year, we expect it to be averaging more than 200,000 per month," said Maki.

Job creation has been one of the biggest disappointments in the current recovery, and economists expect to see a continued drag on the consumer until hiring picks up.

In June, the economy lost 125,000 jobs and the unemployment rate was 9.5 percent.

Maki said while job growth is slow, he does not expect a double dip in the economy.

"I would argue that the ISM non-manufacturing index was inconsistent with some of the fears that are out there — the fears of a double-dip recession," he said.

"The labor market is driven primarily by the service sector... If we were going into a double-dip recession, the service sector would be cutting employment not adding to it, and that's not where we're at." The non-manufacturing ISM survey, released Wednesday, showed a surprise improvement in service sector hiring.

Jonathan Basile, an economist with Credit Suisse, follows the Monster Employment Index, which fell 0.7 percent in July—its first decline in four months. Basile said the seasonal decline is normal, and the trend is still up.

"It's still consistent with job growth, but maybe a little more moderate than we thought. What it means to me is don't look for that higher private jobs number we got a couple months back," he said. Basile noted that private sector jobs growth jumped to 241,000 in April, but has since come in at 33,000 for May and 83,000 for June.

"We think 100,000 tomorrow. Those numbers are not good enough..100,000 private payrolls is not sufficient to get unemployment down," he said.

"It's not up to par. It's sub par. That's why when you have these numbers moderating from private payrolls from April, it doesn't feel good. In past cycles, you had 150,000 on average in the last expansion and 210,00 on average in the prior two expansions. Over time, with structural changes, around 150,000 is probably more acceptable as probably a better rate of job growth," Basile said.

Maki was not so discouraged, and looks at the average of private sector job growth over the last couple months as a positive, even compared to the past recession, when it took 2-1/2 years to grow jobs after the end of the recession. "If you look at the three month average gain, which is at 119,000, we didn't hit that point until March of 2004," he said. This time, the economy started growing jobs in less than a year.

Steven Wieting, a Citigroup economist, agrees that while the jobs recovery feels slow, the return of jobs is actually faster than in the last cycle, but the problem is that the unemployment rate is sharply higher.

"We're expecting to see very slow progress, but progress nonetheless. The gains have occurred somewhat earlier than in the last two downturns," he said.

Citigroup economists also expect a headline decline of 50,000 non-farm payrolls, including the loss of 150,000 government census workers.

Wieting said another big difference in this downturn is that permanent layoffs are at an all-time high. "When people are let go because their employers can do without them, the way you can grow employment without the snapback effect is with new lines of business or new businesses themselves," he said.

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