Market Insider

Friday Look Ahead: US Jobs Growth Could Signal Worrisome Slowdown

The economy's shift into low gear likely made for a worrisome decline in job growth in May.

Economists forecast nearly 100,000 fewer jobs were added in May than in April, which had job growth of 244,000. Reuters reports the consensus of economists in its survey expect 150,000 new non farm payrolls and an unemployment rate of 8.9 percent.

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"I'm really worried about tomorrow's number. I don't have a lot of confidence that it's going to be strong," said Deutsche Bank chief U.S. economist Joseph Lavorgna, who expects to see 160,000 jobs for May. "..I just think in some ways, we're trying to catch a falling knife. We're looking at an economy that last year grew 2.8 percent. This year maybe it grows a bit better than that. A lot of the reasons we have weak growth may be exogenous factors, and the economy isn't that strong. Any type of shock is going to make a difference."

The May jobs report, expected at 8:30 a.m. Friday, has been in hyper focus as markets navigated a flow of negative surprises in manufacturing, housing, and the jobs front this week. Thursday's trading was contained after Wednesday's more than 2 percent stock market selloff on a sharp drop in the ISM manufacturing survey and a shockingly small showing of just 38,000 new jobs in ADP's private sector report.

Stocks drifted Thursday, with the Dowfalling 41 to 12,248, and the S&P 500 down 1 at 1312. The flight-to-quality to the bond market relaxed Thursday, and the yield on the 10-year edged back above 3 percent. It was yielding 3.03 percent late in the day, as bond prices weakened.

More negative news for jobs came Thursday in the National Federation of Independent Businesses survey, which showed a lack of small business hiring as well as a disturbing increase in small business firings. Of the companies surveyed, 10 percent planned to increase employment by an average of 3.2 percent, but another 13 percent were looking to reduce employees by an average 3.1 percent.

The weeks of weaker economic reports have economists trimming their second quarter growth forecasts to under 3 percent. But, for the most part, they have dismissed the idea that the soft patch is anything more than a temporary phenomena. They have more confidence in the second half and point to the temporary hits from high oil prices and from supply chain disruptions caused by the Japanese earthquake and tsunami.

For instance, the auto industry lost production of 350,000 cars in the U.S. alone due to the Japan disruptions, notes Mesirow  Financial's Chief Economist Diane Swonk. She said the return to production coincides with the normal auto industry seasonal shutdown. "I wouldn't be surprised if either in July or August there's a real spike after these really anemic months. Some of it's transitory," she said.

Swonk shaved her second quarter forecast for GDP to 2.4 percent, above the 1.8 percent of the first quarter. However, she expects a pickup in the third and fourth quarter. "Even if we can stabilize in sort of a 3 percent growth range by 2012, that's nothing to write home about. This is not an easy economy unless we're generating more jobs," she said.

States and local governments should continue to show job losses, especially as federal stimulus funds have wound down. "There could be a bigger teacher hit. State and local has been weak and that's going to continue to be a headwind as we move through the year," she said.

Economists also see the impact of spiking oil and gasoline prices as abating, now that gasoline prices are falling. The national average Thursday was $3.78 per gallon, down from $3.98 on May 13, according to AAA.

"The transitory stuff should be a blip on the radar screen if the recovery was less fragile...If you're skating on thin ice, do you want to see it melt and see it get warmer? That's kind of what we're in the middle of right now. While I don't think a double dip is probable, I can see why people are worried about it," Swonk said.

She also said it's unclear when the 50,000 hires added by McDonald's in a well-publicized one day hiring spree would show up in the May jobs report.

Swonk forecasts 130,000 jobs for May, with 155,000 coming through private sector hirings. The rising price of fuel and other commodities impacted hiring. "Retailers couldn't pass along the price increases like they thought they could. Wal-mart couldn't pass along price increases. So I guess that hits your margins, and you can't hire as many people," she said.

"Family restaurants aren't hiring. They have to offer value meals," she said. 

Barclays Capital chief  U.S. economist Dean Maki expects to see 190,000 new jobs were added in May. "Recent data releases do suggest some downside risk. On the other hand we saw continued high levels on ISM employment index, and jobless claims are really not showing a significant deterioration in the labor market. The only thing that would point to much weaker report would  be the ADP report, but we have not found that to be very predictive on a month to month basis," he said.

Maki said he is waiting to see the May jobs report before he tweaks his view on the second quarter.

LaVorgna said one possible bright spot that may start to translate into hirings soon are early signs of improvement in construction spending. In April, private non residential construction was up 9.3 percent, relative to the first quarter average, which fell at a rate of 17 percent. Residential investment is up 3 percent relative to the first quarter average. This also coincides with a pickup up in commercial real estate lending in the Fed's senior loan officers survey. "That's important because those are leading indicators," he said.

Swonk said the tornados and storm destruction in the midwest and elsewhere this spring should also result in some pickup in construction activity.

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