Via Goldman Sachs' Karen Heichgott,
We forecast nonfarm payroll growth of 225k in July, in line with consensus expectations. Many labor market indicators were softer in July, but some important service sector indicators, such as ISM nonmanufacturing employment, were significantly stronger. On balance, we expect job growth roughly consistent with the 223k increase in June.
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We expect the unemployment rate to hold steady at 5.3%. Participation should at least partially rebound following an unexpected dip in June that likely reflected calendar effects. Finally, average hourly earnings are likely to rise 0.2% month-over-month in July.
We forecast nonfarm payroll job growth of 225k in July, in line with consensus expectations. Reported job availability, the employment components of most manufacturing surveys, and ADP employment growth softened, but the employment components of most service sector surveys improved, particularly the ISM nonmanufacturing survey, which surged to its strongest level since 2005. Overall, the July data point to a gain roughly in line with the 223k increase in June.
Arguing for a stronger report:
- Service sector surveys. The employment components of service sector surveys were broadly positive in July. The employment components of the ISM nonmanufacturing (+6.9pt to 59.6), Dallas Fed (+4.5pt to +10.1), Richmond Fed (+2.0pt to +12.0), and Markit PMI surveys rose, while the employment component of the New York Fed index (-2.9pt to +17.2) declined. Service-sector employment gains rose to 222k in June and averaged 195k over the last year.
Arguing for a weaker report:
- Manufacturing employment indicators. The employment components of almost all of the major manufacturing surveys weakened in July. The employment components of the ISM manufacturing (-2.8pt to 52.7), New York Fed (-5.5pt to +3.2), Richmond Fed (-5.0pt to +1), Kansas City Fed (-10.0pt to -19), Dallas Fed (-2.1pt to -3.3), Philly Fed (-4.2pt to -0.4), and Markit PMI surveys declined, while the employment component of the Chicago PMI survey improved slightly. Payroll employment growth in the manufacturing sector picked up a bit to 4k in June, just below the average gain of 6k per month seen over the last year. Given that the manufacturing sector is more exposed to international trade than the services sector, the recent softness in manufacturing indicators could in part reflect the appreciation of the dollar.
- Job availability. The Conference Board's labor differential—the net percent of households reporting jobs are plentiful vs. hard to get—worsened by 1.2pt to -6.0 in July but remains near its post-recession high.
- ADP report. ADP employment rose 185k in July, below consensus expectations. In general, initial print ADP estimates have not been strong predictors of initial print totalpayroll 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 relatively small gain of 25k in the July ADP report.
Neutral factors:
- Jobless claims. The four-week moving average of initial jobless claims in the payrolls reference week remained roughly unchanged at 279k.
- Online job ads. According to the Conference Board's Help Wanted Online (HWOL) report, which we mainly see as a leading indicator, both new and total online job ads rebounded in July following large decreases in June. Although online job ads have risen over the past year, the trend over the past three months has slowed.
We expect the unemployment rate to hold steady at 5.3% in July, from an unrounded 5.285% in June. The headline U3 unemployment rate declined by 0.2pp in June, while the broader U6 underemployment rate declined by 0.3pp to 10.5%. 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. The participation rate showed a surprising drop of 0.3pp in June to 62.6%. However, the decline likely resulted in large part from a calendar effect caused by the timing of the reference week relative to the end of the school year (Exhibit 1), and we therefore expect an at least partial rebound in July.
Exhibit 1: Calendar Effects Probably Depressed Participation in June
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We expect a 0.2% increase in average hourly earnings for all workers. While the July print should reflect some bounce-back from the flat read in June, this will likely be offset by the late timing of the reference week within the month. Average hourly earnings for all workers rose 2.0% over the year ending in June, while average hourly earnings for production & nonsupervisory workers rose 1.9%. Our Wage Tracker also stands at 2.0% year-on-year as of 2015Q2. While we expect wage growth to pick up somewhat by year-end, it will likely remain well below our 3.5% estimate of the full employment rate.
Recent data on wage growth have disappointed expectations. Our GS Wage Tracker stands at 2.0% year-on-year, showing no improvement from its average value over the past six years. Although some special factors in recent ECI and average hourly earnings data might have resulted in an unduly pessimistic view of wage growth in Q2, the broader trend remains quite subdued. We think the Fed would take comfort from a pickup in wages, as the level of wage growth provides a useful cross-check on the amount of slack remaining in the labor market. Fundamentals argue for at least a modest improvement in wage growth in coming quarters, in our view. Upcoming changes to state minimum wage laws will probably not move the needle on national aggregate wage metrics.
