Despite much hopeful banter among the mainstream media, Goldman forecast nonfarm payroll job growth of 220k in June, notably below consensus expectations of 234k.
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This is roughly in line with Goldman's expectations for below average job growth over the remainder of 2015. Employment indicators were mixed in June: reported job availability, the employment components of most manufacturing surveys, and ADP employment growth improved, but jobless claims and job cuts both rose slightly and online job ads declined. Overall, the June data point to a gain below the very strong 280k increase in May.
Arguing for a stronger report:
- Manufacturing employment indicators. The employment components of the major manufacturing surveys were better on net in June, though many remain at somewhat soft levels. The employment components of the ISM manufacturing (+3.8pt to 55.5), New York Fed (+3.4pt to +8.7), Richmond Fed (+1pt to +4), Kansas City Fed (+8pt to -9), Dallas Fed (+7pt to -1.2), and Markit PMI surveys improved, while the employment components of the Chicago PMI and Philly Fed (-2.9pt to 3.8) surveys declined. Payroll employment growth in the manufacturing sector picked up a bit to 7k in May but has averaged just 4k over the last four months, below the average gain of 15k seen over the last year. While the manufacturing sector is more exposed to international trade than the services sector and appeared to suffer from the strong dollar earlier in the year, manufacturing indicators have improved recently.
- Job availability. The Conference Board's labor differential—the net percent of households reporting jobs are plentiful vs. hard to get—improved by 2.3pt to -4.3 in June, close to the post-recession high.
- ADP report. ADP employment rose 237k in June, above consensus expectations. ADP uses outside information to filter its raw data, and some of the strength could reflect the prior-month nonfarm payrolls print. In general, initial print ADP estimates have not been strong predictors of initial print total payroll gains reported by the Labor Department. However, we have found somewhat stronger correlations between ADP and nonfarm payrolls for some industries, in particular trade, transportation and utilities, which saw a solid 50k gain in the June ADP report.
Arguing for a weaker report:
- Jobless claims. The four-week moving average of initial jobless claims in the payrolls reference week rose 10k to 277k. Encouragingly, however, in states with large energy industries such as Texas, Oklahoma, and North Dakota, weekly claims have declined somewhat following large increases in prior months.
- Online job ads. According to the Conference Board's Help Wanted Online (HWOL) report, both new and total online job ads fell in June following large increases in May. The decline in job ads in June occurred across all geographic regions. Among occupational categories, the largest declines came in office and administrative support and in sales.
- Job cuts. Announced jobs cuts reported by the Challenger, Gray and Christmas report rose modestly in June on a seasonally adjusted basis, reflecting increases in cuts in the chemical and retail industries. Averaging across May and June, job cuts–which tend to be an early indicator of actual layoffs–declined a bit from the previous months, due mostly to a normalization of energy-sector job cuts, but remain slightly on the higher side of recent norms.
Neutral factors:
- Service sector surveys. The ISM nonmanufacturing and Markit PMI service sector surveys are not yet available for June. Fed surveys were mixed, with the employment component of the New York Fed survey rising sharply (+15.3pt to 20.3), while the employment components of the Richmond Fed (-3pt to +8) and Dallas Fed (-3.3pt to +5.6) surveys declined. Service-sector employment gains rose to 256k in May and averaged 212k over the last year.
We expect the unemployment rate to decline one-tenth to 5.4% in June, from an unrounded 5.508% in May. The headline U3 unemployment rate declined by 0.8pp over the last year and the broader U6 underemployment rate declined by 1.3pp. Looking further ahead, we expect U3 to reach 5% by early 2016 and U6 to reach our 9% estimate of its full employment rate by the end of 2016.
We expect a softer 0.1% increase in average hourly earnings for all workers in June as a result of calendar effects. Average hourly earnings for all workers rose 2.3% over the year ending in May, while average hourly earnings for production & nonsupervisory workers rose 2%. We see some preliminary signs of a pickup in wage growth, which we expect to reach about 2.75-3% by year-end, still below our 3.5% estimate of the full employment rate.
Source: Goldman Sachs
