Market Braces for What Could Be Another Weak Jobs Report

U.S. job growth in May was likely sluggish and well below the first-quarter’s pace.

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That does not bode well for an economy that some fear is showing signs of unexpected strains, at the same time Europe’s sovereign debt crisisthreatens financial markets and confidence.

The May employment report, due at 8:30 a.m. ET Friday, is expected to show that about 150,000 jobs were added in May, above April’s 115,000 but below the 200,000-plus reported earlier in the year. The unemployment rateis expected to hold steady at 8.1 percent.

“It’s not really a testimony to strength in employment, and I think we’re still in a rocky period,” said Diane Swonk, chief economist at Mesirow Financial. Swonk reduced her forecast Thursday to 125,000 jobs in May from 150,000 after ADP’s private-sector payroll data showed just 133,000 jobs were added for the month.

May’s jobs report has been anticipated as a critical piece of information on the U.S. economy, which is seen as being sturdier than those in Europe and other parts of the world. However, a series of spotty data has raised concerns that a slowing and worrisome Europe and weaker Chinese growth may be putting the U.S. on a slower track. The May number could also play into the economic debate about how much of the up and down activity of the first half of the year is due to the warmer-than-normal winter weather.

The important jobs report comes as the investors close the books on the wild month of May, which saw the worst monthly stock market decline in two years, with the Dow ending 6.2 percent lower at 12,393. At the same time, end-of-month and safe-haven buying sent investors into Treasurys, driving the yield on the 10-year to a record low closing yield of 1.58 percent. The dollar index gained 5.5 percent for the month, finishing above 83, and the euro lost 6.6 percent against the dollar.

Oil, a measure of global growth, plunged 17.5 percent in May to $86.53, its worst monthly performance since December 2008.

As for jobs, Thursday’s higher-than-expected jobless claims of 383,000 was also seen as a negative factor for employment, even though the number is not reflected in the May report.

“I would say there’s been a downshift in forward-looking labor indicators that’s going to continue,” said Jonathan Basile, Credit Suisse economist. “We’re not going back to the 200,000-plus numbers anytime soon. Faster job growth needs people and companies to open their wallets. Higher jobless claims are another way to a handicap that. The higher they go, the more it means there’s ‘risk off’ in labor decision-making.”

Basile said he expects to see 170,000 total jobs added in May, partly because he expects additions in the areas of transportation, leisure, education and health care, all lower-than-expected last month.

“But we have gotten a run of information that’s a little bit softer from a layoff perspective and just solidifying a downshift in job growth. It’s not just information that tracks the labor market. The growth number didn’t make the grade,” he said of first-quarter GDP. GDP revisions reported Thursday put first-quarter growth at 1.9 percent, which was expected by economists but occurred before the recent worries emerged about Spain’s banksand the Greek election.

Basile also pointed to Thursday’s report of Chicago PMIwhich fell to 52.7, a more than 2-year low. It follows a decline earlier in the month in the Philadelphia Fed survey, which dropped to negative 5.8 from positive 8.5 in April, its weakest level in eight months.

“The Chicago number has become a whole economy survey. It tells you more about broader economic trends than just the manufacturing sector … Not to mention, when you see Chicago and Philadelphia, the two regions with the longest track records, have abrupt moves at the same time — it’s disconcerting,” said Basile.

Pierpont Securities chief economist Stephen Stanley disagrees that the trend is worsening. He points to improvements in housing in recent months and consumer spending, supported, he believes, by better job growth.

Stanley expects to see 180,000 total payrolls for May. “In my view, the underlying economic trend remains relatively steady but muted, corresponding to real GDP advances in the 2-percent to 3-percent range and monthly payroll gains of 150,000 to 200,000,” he wrote in a note.

Barclays Chief U.S. economist Dean Maki said he expects to see 150,000 jobs in May, bouncing back from April’s depressed level. Maki said he believes the weather is behind some of the unevenness in jobs data, boosting the number of hires in December through March. Payback for those early hires showed up in weak jobs growth in March and April.

“We ‘re going to have a more neutral reading in May, which we see bouncing back to 150,000. We’ve been having this consistent pattern of upward revisions and we would expect the (April) 115,000 to be revised upward,” he said.

“We would expect the primary bounceback to come in the services sector, also construction would be better than in some of the weak recent months, which we think are the flipside of the boost we had in the winter,” he said.

Maki also said he expects to see the hiring pace rise into the back half of the year, with the monthly rate returning to 200,000.

Any weather effect should be over after May, so Stanley says a better read of the jobs market will be found by averaging the six months through May, potentially a 200,000-plus number depending on revisions.

The drop in the unemployment rate, while the jobs market remains soft, has been blamed on a drop in the job-market participation rate. Swonk said she believes that number is distorted by demographics and expects that to continue as an increasing number of the baby boom generation retires.

Besides the jobs report Friday, the ISM manufacturing survey, an important indicator and read on employment, is slated to be reported at 10 a.m., as is construction spending. Personal income and spending is expected at 8:30 a.m. Friday and monthly vehicle sales from big auto makers including GM and Ford are reported throughout the day.

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