June may end up being a turning point for the job market, even if job creation still shows up to be relatively light in the government employment report Friday.
About 125,000 non-farm payrolls are expected to be added for June, better than the sub-100,000 figure economists had expected just a few days ago and more than double May's 54,000 payrolls.
A private-sector reading from ADP gave economists a last-minute reason to tweak their forecasts Thursday. ADP, a widely followed measure but often not consistent with the jobs data, showed a much better than expected 157,000 jobs were added for June. Friday's jobs report is released at 8:30 a.m. and is expected to show an unchanged unemployment rate of 9.1 percent.
"I think the official data may lag the ADP data given the time it (the survey) was taken. We do know manufacturing is coming back. That's the good news. We should see it, but the question is how much will show up in this report," said Mesirow chief economist Diane Swonk. Swonk expects to see 130,000 private sector jobs were added, but the loss of another 30,000 government jobs will take the payrolls number to 100,000.
"We should get back on the 200,000 range and we could even exceed that, getting an outsized number in July and then settle back down again...It will be in line with reacceleration of growth," said Swonk. But she adds, "The headwinds are still there."
Stocks bounded higher Thursday, in part on the ADP report. The Dow was up 93 at 12,719, and theS&P 500 was up 14 at 1353. The S&P 600 small cap index closed at an all time high, as did the Dow Transports.
"I think it's important to remember with respect to the ADP, its correlation with the monthly employment number is at times strained. Sometimes it gets it pretty right. Other times, it indicates job growth better or worse by 200,000. It's definitely encouraging to see the ADP number be so strong, but does that mean the employment report would be up by the same amount? I don't know," said Dan Greenhaus, chief strategist at BTIG.
"Those of us in the transitory camp were simply arguing that the spring slowdown was related to a lot of factors that would pass. While those negative headwinds are expected to wane, we have to keep in mind there is a lackluster economy and the rise in growth rates is still going to be muted," he said. However, he said he does expect to see employment return to numbers that exceed the May and June levels: "175,000 to 200,000 as the year progresses."
Economists say the extent of the recovery in jobs after June will depend on how broad based the economic recovery is from the current soft patch. Recent data, like June's Institute of Supply Management manufacturing survey, has shown surprise strengthening and is signaling a rebound that could be linked to auto production. Encouraging data Thursday was an average pickup of 6.9 percent in major chain stores' June sales, indicating high gasoline prices are not holding back consumer spending as much as some had feared.
Besides high energy prices, the soft patch has been blamed on the supply chain disruptions from Japan's earth quake, and the impact of flooding and storms around the U.S. The auto industry is expected to ramp up production going into the summer, after it was impacted in the spring due to shortages in supplies from Japan. A pickup in Japan's industrial production last month to show the best gain in more than 50 years is signaling that the manufacturing hit from the earth quake and tsunami is beginning to lift.
Mark Zandi, chief economist at Moody's Economy.com, said he raised his forecast to 125,000 from 110,000 non farm payrolls, based on the ADP report. He expects the job market to pick up over the next couple of months. "I think that by Q4, we'll be back getting 200,000 on average. It's not going to be a straight line. It never is," he said.
Important to see in the June number, he said, would be a pick up in temporary hires and hours worked, both signals of future hiring.
Economists are also looking to see the recovery to extend beyond the auto industry. Zandi says while manufacturing is 15 percent of GDP and 10 percent of jobs, it has been more than half the GDP growth in the last two years.
Small Business Hiring
The National Federation of Independent Business jobs report, released Thursday, showed a continued dismal view of the job market from Main Street. Small business reported job losses averaging 0.23 workers per firm, after four months of gains. Manufacturers added an average of 1.1 workers per firm, but other businesses lost workers, including financial, construction and non professional services. One relative positive was future hiring plans, said Credit Suisse economist Jonathan Basile.
Over the next three months, 11 percent of small businesses in the survey plan to increase employment, while 7 percent plan to cut their workforce, an improve ratio over last month. Fifteen percent, an improvement of 3 percent, reported they had unfilled jobs. "That's a relief but at the same time you put it into the context where you still have job creation running at a slower pace in May and June then when a few months back it was printing 200,000 plus," said Basile. Basile expects to see 150,000 non-farm payrolls for June.
He said it's too early to call a turning point for jobs creation, just as it's too soon to declare an end to the soft patch. "I think that's still an open question because I'd like to see the full swatch of leading indicators, particularly how jobless claims performed this month," he said. Thursday's jobless claims fell to 418,000 and have been elevated above 400,000 since April.
"Anytime the economy picks up, there may be a little bit of time before the jobs numbers react to that improved picture, and it also has to be a broad improvement for it to matter," Basile said, adding it is still unclear whether the rebound reaches beyond the auto industry.
Citigroup economist Steve Wieting cautions that seasonal factors will still be a factor in July, claims reports could be choppy, and that there could still be seasonal shutdowns at auto plants, even with the recovery from the Japanese disaster. In a recent interview, he said the ISM manufacturing data could be showing that some of the production has returned sooner than expected.
Swonk said GDP growth should accelerate to 3.6 percent in the third quarter, in part because of the auto industry. She expects 3.4 percent for the second quarter but many economists have numbers below 3 percent. "Third quarter is really an inventory play with the auto sector and you also get some pull forward," she said. She expects the fourth quarter GDP to be 3.4 percent.
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