Friday Look Ahead: July Job Losses Seen Slowing

July's employment report could show job losses abating more than expected, even as the unemployment rate creeps closer to 10 percent.

Wall Street economists were still crunching their forecasts Thursday, with some coming in well under what had been the street's consensus.


"The consensus is for right around minus 325,000 and that consensus has slowly risen, as evidenced by Goldman and Deutsche today. That tells me that if it's true, the position of the street is it's bracing for a stronger than consensus print," said RBS head Treasury strategist Bill O'Donnell. He said bonds had been pricing in some fear about the number. "For the bond market, the fear is a less negative number, which would be good for stocks."

Goldman Sachs economists Thursday trimmed their forecast from -300,000 to -250,000 and maintained an expected unemployment rate of 9.7 percent. Deutsche Bank chief U.S. economist Joseph LaVorgna revised his forecast for non farm payrolls to -150,000, from -325,000.

The improved outlook for jobs follows on a batch of raised expectations for third quarter GDP in the past week. Many economists now expect the quarter to show growth, based on recent economic data and some optimism that the automobile industry is gaining traction from the "cash for clunkers" program. The benefit from "clunkers" may be temporary, however.

"The economy is growing this quarter. I think the job loss has been extreme because a lot of it has to do with the financial crisis immediately following Lehman. If GDP is turning positive for the first time against that backdrop, it seems reasonable at some point that the rate of job losses would slow and slow quite markedly," said LaVorgna.

"When you're at an economic inflection point, as we are, we think right now the improvement in payrolls tends to be greater than the improvement in (unemployment) claims," he said.

On Thursday, the government said new claims for unemployment benefits fell to 550,000 last week, from a revised 588,000 the week earlier. Economists had expected 580,000 new claims.

Goldman Sachs economists, in a note, said one reason they changed their forecast is because of a stabilizing in the economy and an improvement in jobless claims, which indicates improvement in the labor market. Goldman pointed out that its view is for a better outcome even after correcting for the seasonal distortions created by the shut down of auto plants. It also notes that the short-term hiring and then firing of government census workers reduced payrolls by 49,000 in June.

However, Mesirow Financial chief economist Diane Swonk said she's sticking to her forecast for losses of 400,000 payrolls. "I actually think it's going to be a worse number, more like 400,000, but I'm not sure how relevant that is because we're going to see improvement in August and September given the (automobile) production schedule," she said.

"The other issue is the shadow unemployment rate. How are people who are so discouraged and long-term unemployed doing? These are the issues that are becoming part of the cost to the budget regardless of whether you a have stimulus or not. It really underscores that no matter how you cut it, it costs revenues when you have a recession. The other subplot is the chronically unemployed. It's a big deal," she said.

Swonk said the "shadow" unemployment rate — including the underemployed and people who no longer look for jobs — is about 16 or 17 percent.

While manufacturing job losses may show some signs of abating, previously strong areas like health care and education should show reductions. "A lot of hospitals are cutting back. They're cutting back on administration," she said.

One sector that may see a pickup sooner than others is small business. If you look at statistics provided by the National Federation of Independent Business, which represents small business, it sees the unemployment rate lower by October, at 9.1 percent. This contrasts with the expectation of most Wall Street economists, who believe the unemployment rate will continue to climb and peaks at double digit levels some time between late this year to mid next year.

William Dunkelberg, an economist for the group, reports that small businesses were still shedding jobs in July — with 24 percent surveyed reducing employment by 4.1 workers.

"I looked at the July numbers and by industry and by region, everything was flat to down...As far as job creation, we need the consumer to come back," he said.

In the next three months, the NFIB's survey shows that 14 percent of the businesses plan to reduce employment, while 9 percent plan to create new jobs. Owners are also cutting compensation as well.

The NFIB's forecast tends to forecast the actual unemployment rate fairly well, if you look at a chart. Dunkelberg said it went off course once, during the recession of the early 1980s.

"Fortunately we don't have a lot of recessions to look at. I think it probably squares up with me okay because we're not firing as many people ... that could bring the unemployment rate down. It's still very high, " he said. "If we quit firing people, the unemployment rate will come down. Even in the best of times of 4.5 percent unemployment — there are 350,000 people every week filing for unemployment claims."

Dunkelberg also said the summer is a slow season for hiring and fall hiring doesn't show up until August and September.

Average Change in Employment Per Firm
Average Change in Employment Per Firm

Stocks traded in a narrow range Thursday, in subdued trading ahead of the jobs report. The Dow as down 24 at 9256, while the S&P 500 was down 5 at 997, its first close below 1,000 since last Friday. The worst performers were defensive telecom, down 1.2 percent and health care, off 1 percent. Industrials were the best performer, up 0.6 percent.

Bonds drifted in slow trading. "If you look at the 10-year, they were sharply unchanged," said O'Donnell.

The 10-year was trading 3.76 percent. The dollar was slightly higher and commodities were mostly lower.

Besides the 8:30 employment report, other data includes consumer credit at 3 p.m. AIG reports earnings Friday. The stock has moved sharply higher this week, in what traders describe as a short squeeze.

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