Note to readers: This jobs preview story hasn't been updated since the May jobs report was released on Friday morning. Although hiring was surprisingly strong, the workweek shrank and is now shorter than it has been since the Covid lockdown. For details, please see today's story.
A Federal Reserve rate hike on June 14 still may hinge on Friday's jobs report, though it might take a really strong report to prompt another tightening. Yet odds still favor a July hike unless labor market data soften. Coming as Fed tightening via a shrinking balance sheet is about to dry up liquidity after the debt-ceiling deal, higher rates could squeeze the life out of the current S&P 500 rally.
On Thursday morning, the monthly employment report from payroll processor ADP estimated that private-sector employers added 278,000 jobs in May, far above estimates of 160,000. The ADP gain included a massive gain of 94,000 jobs in the natural resources and mining sector. That's a bit hard to fathom, amounting to a 5% increase in a single month. Construction employment rose by an estimated 64,000, offsetting a 48,000 drop in manufacturing. Leisure and hospitality employment surged by 208,000.
New claims for jobless benefits ticked up 2,000 to 232,000 in the week through May 27, lowering the four-week average by 2,500 to 229,500. Continuing claims rose 6,000 to 1.795 million in the May 20 week.
Also on Thursday, outplacement firm Challenger, Gray & Christmas reported that announced layoffs rose to 80,100 in May, up 20% from April and nearly quadruple year-ago totals. Through the first five months of the year, employers announced 417,500 planned layoffs, up from 100,700 in the same stretch of 2022.
Following the ADP report and jobless claims, S&P 500 futures pointed to a flat open for stocks, though Dow Jones futures were off slightly.
Job Openings And Labor Turnover
On Wednesday morning, the monthly Job Openings and Labor Turnover survey painted a picture of ongoing labor market strength. The number of job openings at the end of April unexpectedly rose by 358,000 from the prior month to 10.103 million. Total hires edged up about 1% to 6.115 million, while separations, including quits and layoffs, fell nearly 5% to 5.7 million.
After the data, S&P 500 losses widened on the session. Yet investors shouldn't overreact. The data wasn't uniformly strong and may look less so after subsequent revisions. For example, net hiring in March was revised down from 217,000 to 72,000. That lessens the shock of April's 407,000 increase.
Indeed Hiring Lab research director Nick Bunker noted that other measures of job openings and hiring intentions, including the Indeed Job Postings Index, "show a continued moderation."
Lastly, the JOLTs survey, which is based on a survey of 21,000 worksites, is a lot less reliable than monthly jobs report, which covers 666,000 and itself has significant limitations. That's especially the case because the response rate to the JOLTs survey has fallen to around 30%, according to BLS data.
Federal Reserve Rate-Hike Odds
After the ADP employment report on Thursday morning, markets were pricing in 30% odds of a quarter-point Fed rate hike to a range of 5.25%-5.5% on June 14. That would be the highest since 2001.
Rate-hike odds fell after Philadelphia Fed boss Patrick Harker said on Wednesday that he wants to skip a June rate hike, but is open to a July hike.
Odds that the Fed's key rate will rise to 5.25%-5.5% by July 26 have moderated to just below 60%,
Despite strong JOLTs and ADP data, there's some reason to think that the May and June jobs reports may be soft enough to give the Federal Reserve pause. Confirmation that the job market is running out of steam could lower long-term market interest rates, helping to offset Fed quantitative tightening, and provide near-term support to the S&P 500 and growth stock valuations.
Jobs Report Expectations
Wall Street economists are forecasting that the May jobs report will show that employer payrolls grew by 180,000 as the unemployment rate ticked up to 3.5%. Average hourly earnings are seen rising 0.3% on the month, as annual wage growth holds at 4.4%.
Here are four reasons the picture may be significantly weaker. Yet keep in mind that the jobs report is subject to revision once more complete data come in. That means the data could still exhibit strength, even after the labor market has turned.
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Q4 Employment Data Revisions
The Labor Department reported last week that private-sector employment rose by 3.635 million in the 12 months through December. The implication: Private employers added 725,000 fewer jobs in 2022 than the 4.36 million indicated by monthly jobs reports.
The new data comes from the Quarterly Census of Employment and Wages (QCEW), which tabulates employment and wage data based on unemployment insurance records for 11 million worksites. By comparison, the Labor Department's monthly employment reports are estimates based on a survey of 122,000 businesses comprising 666,000 worksites.
The more comprehensive data set isn't adjusted for seasonality, so only year-over-year comparisons are appropriate. However, the shortfall in job growth appears to have taken hold in Q4. QCEW data through Q3 shows 12-month job growth running above totals reported in monthly jobs reports. Plus, the Commerce Department last week slashed the Q4 increase in wages and salaries by $135.4 billion to $53 billion.
Why might the jobs reports have overstated actual job gains? The Labor Department may have made overly optimistic assumptions about the net change to hiring as new firms spring up and old firms close up shop. Since the government can't survey firms it doesn't yet know about or that no longer exist, statisticians use recent history to forecast the impact of firm births and deaths.
In April, the Labor Department assumed that the net impact of firm births and deaths added a hefty 378,000 jobs to the seasonally unadjusted totals, despite tight bank credit and an uncertain economic outlook. That topped the 323,000 added in April 2022, when the Fed had just begun to raise rates, and the 309,000 boost in April 2021, early in the Covid-era boom in new business creation.
The latest QCEW employment figures will inform forward-looking estimates of the impact of firm births and deaths. That means we may see more modest assumptions in the months to come, if not in May's report.
Seasonal Adjustment
The April jobs report showed that employers added 253,000 payroll positions, including 230,000 in the private sector. The overall picture was much less robust, given that employment gains in February and March was revised lower by a combined 149,000 jobs.
Even so, seasonal adjustment appeared to give an artificial boost to the total. Before seasonal adjustment, the 830,000 private jobs added in April trailed the 971,000 added in April 2022 by 141,000. However, adjusted for seasonal effects, the private sector's 230,000 payroll increase topped the seasonally adjusted gain of 226,000 last year.
April's employment lift from seasonal adjustment might reverse somewhat in May, but that's by no means certain.
Social Security Claims Surge
Despite a surge in announced layoffs, weekly claims for jobless benefits have climbed only modestly, with the four-week average up 8% from a year ago. Meanwhile, the number of people continuing to claim jobless benefits, which rose steadily from around 1.3 million in September to 1.8 million in March, has stabilized in recent months.
The leveling off of continuing claims suggests that the fairly modest number of people claiming unemployment are able to find new jobs pretty quickly.
Yet several factors might have held down both new and continuing claims so far this year. It can take a few months to implement layoffs. Plus, laid-off workers may not claim unemployment benefits while receiving severance. In California, for example, severance pay reduces jobless benefits.
Here's another possible factor: Claims for Social Security retirement benefits have surged so far in 2023. Social Security Administration data shows that 2.1 million people claimed benefits in the first four months of the year, up about 283,500, or 15.5%, from the same period in 2022.
Small Business Hiring
The National Federation of Independent Business' small business optimism index is at the lowest level in more than a decade. Nearly one-third of small firms say they're dependent on bank credit at a time when short-maturity loans come with an average 8.5% interest rate, up 5 percentage points from March 2022.
As demand slackens and pricing power ebbs, high borrowing costs likely will push small businesses to cut their biggest expense: labor.
The Paychex/IHS Markit Small Business Employment Watch released Tuesday showed payrolls dipping 0.04% in May, as hours worked declined and 12-month wage growth slipped to 4.3% from 4.5%.
S&P 500
After Thursday's JOLTs data, the S&P 500 slipped 0.6% to around 4180. That's after the S&P 500 inched ahead on Tuesday to notch its highest close since last August.
Volatility around the debt-ceiling deal heightens near-term risk for the S&P 500. The Treasury's inability to issue debt in recent months has more than offset Fed efforts to tighten financial conditions by unloading assets purchased during the Covid-19 pandemic. But Treasury issuance is likely to surge following a deal to raise the debt ceiling.
The S&P 500 dived more than 10% in two weeks surrounding the Aug. 2 debt ceiling deal.
A replay of that stock market sell-off is far from certain, since debt-ceiling negotiators didn't need a push from financial market stress to reach a compromise. The rally in artificial intelligence stocks also might have legs.
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