- ADP employment expected to show another solid increase
- U.S. pending home sales expected to show continued weaknessÂ
- China’s Caixin manufacturing PMI expected to show a small decline
ADP employment expected to show another solid increase — The consensus is for today’s June ADP employment report to show a gain of +600,000, downshifting from May’s large increase of +978,000. The markets are carefully watching the labor market since the Fed will start to raise interest rates when the labor market gets back to full employment.
ADP jobs have so far recovered by +12.2 million jobs from the pandemic trough posted in April 2020. However, ADP jobs have recovered only 62% of the jobs lost during the pandemic and would need to rise by another 7.4 million jobs to get back to the pre-pandemic record high posted in February 2020.
The job recovery seen in the past several months has been slower than expected. U.S. Covid infections in the past five months have plunged since peaking in January, allowing the economy to slowly reopen. However, the speed of job gains has been slowed by a variety of factors, including (1) a mismatch of job availability versus employee skills, (2) the need for some people to stay home with children during the tail-end of the pandemic, (3) the fact that about half of the U.S. population is still not fully vaccinated, causing safety concerns for some people who are thinking about returning to work, and (4) questions about whether extra unemployment benefits are causing some people to delay going back to work.
Fed Chair Powell, in his recent post-FOMC meeting press conference, said that these factors “should wane in coming months against a backdrop of rising vaccinations, leading to more rapid gains in employment. Looking ahead, FOMC participants project the labor market to continue to improve, with the median projection for the unemployment rate standing at 4.5% at the end of this year and declining to 3.5% by the end of 2023.
The U.S. unemployment rate in May fell to a 14-month low of 5.8%, but was still well above the pre-pandemic record low of 3.5%. Further progress in bringing down the unemployment rate will be slower because more people will be attracted back into the labor market to look for a job as jobs become more plentiful, thus increasing the pool of persons who are considered unemployed for purposes of calculating the unemployment rate.
The consensus is for Friday’s June payroll report to show an increase of +700,000, improving from May’s rise of +559,000. Payroll growth has lagged ADP job growth in recent months. Over the last three months, ADP jobs showed an average monthly increase of +978,000 while payrolls showed an average monthly rise of only +419,000. It remains to be seen whether payrolls are under-counting job growth or whether ADP jobs are over-counting job growth, but the two are likely to converge at some point.
Payrolls have risen by a total of 14.7 million jobs from the pandemic trough. However, payrolls have retraced only 66% of the pandemic plunge and need to rise by another 7.6 million jobs to match the record high seen in February 2020.
U.S. pending home sales expected to show continued weakness — The consensus is for today’s May pending home sales report to show a decline of -1.0% m/m, adding to April’s decline of -4.4% m/m. Expectations for a continued decline in home sales are due to the tight supply of homes on the market and the high price of the homes that are on the market.
Existing home sales have fallen for four straight months during Feb-May by a total of -13%. However, the current home sales level of 5.80 million units is still relatively strong and is above the pre-pandemic level of 5.70 million seen in February 2020.
The supply of homes remains very tight at 2.5 months, which is tighter than the pre-pandemic level of 3.0 months and is just mildly above the record low of 1.8 months posted in December and January. The tight supply of homes means there simply aren’t enough homes on the market to support a strong sales rate.
Meanwhile, the high price of homes is sparking resistance from some potential home buyers who would rather wait to see if home prices cool off in the coming months as more homes come onto the market. Yesterday’s home price reports for April were extremely strong, illustrating why some potential home buyers are backing off. The FHFA index rose by +1.8% m/m and the S&P Composite 20 index rose by +1.6% m/m. On a year-on-year basis, the FHFA index rose by +15.7% and the Composite-20 index rose by +14.9%.
China’s Caixin manufacturing PMI expected to show a small decline — The consensus is for tonight’s China June Caixin manufacturing PMI to show a small -0.1 point decline to 51.9, reversing May’s small +0.1 increase to 52.0.
The Caixin manufacturing PMI showed some strength in the latter part of 2020 when the Chinese economy was recovering from the pandemic. However, the index has since been moving sideways with a year-to-date average of 51.4. Nevertheless, sentiment in the Chinese manufacturing sector remains generally strong as the Chinese economy is expected to show above-average growth in coming quarters.
China’s GDP is expected to downshift from +18.3% in Q1, but remain strong at 7.8% in Q2, +6.0% in Q3, and +5.0% in Q4. The consensus is for China’s GDP in 2021 to show strong growth of +8.5%, picking up the pace from 2020’s small increase of +2.3%. China’s GDP is then expected at +5.5% in 2022 and 2023.
