- Unemployment claims report is expected to show a continued improvement in U.S. labor market
- ISM manufacturing index expected to remain strong
Unemployment claims report is expected to show a continued improvement in U.S. labor market — Today’s weekly unemployment claims report is expected to show a continued improvement in the U.S. labor market. The consensus is for today’s initial unemployment claims report to show a decline of -24,000 to 387,000, adding to last week’s -7,000 decline to 411,000. Meanwhile, today’s continuing claims report is expected to show a decline of -50,000 to 3.340 million, adding to last week’s -144,000 decline to 3.39 million.
Claims are near 15-month lows but remain elevated relative to pre-pandemic levels. Initial claims are still 195,000 above the pre-pandemic level seen at the end of February 2020, and continuing claims are 1.68 million above the pre-pandemic level.
There was some good news on the labor front yesterday with the report that June ADP employment rose by +692,000, stronger than expectations of +600,000. However, that news was offset to some extent by the -92,000 downward revision for the May ADP report to +886,000 from +978,000. ADP jobs have risen by a monthly average of +733,000 over the past three months (April-June). ADP jobs have recovered 65% of the pandemic job losses and need to rise by another 6.8 million to match the pre-pandemic record high.
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 3-month period of March-May, ADP jobs showed an average monthly increase of +676,000 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.
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.
ISM manufacturing index expected to remain strong — The consensus is for today’s June ISM manufacturing index to show a -0.2 point decline to 61.0, giving back a little of May’s +0.5 point increase to 61.2.
The ISM manufacturing index surged to a 37-year high of 64.7 in March as the Covid infection rate plunged and led to expectations for the end of the pandemic. The ISM index has since backed off a bit as the initial euphoria wore off and as obstacles arose, such as the chip shortage, supply chain disruptions, and high commodity and input prices. Nevertheless, the current 61.2 level of the ISM index indicates strong optimism in the U.S. manufacturing sector.
The ISM manufacturing new orders sub-index in May rose to a very strong 67.0, which was just 1.0 point below March’s 17-year high of 68.0. The strong new orders index indicates that the orders pipeline is very full for the U.S. manufacturing sector, ensuring continued strength in shipments in the coming months.
On the price front, today’s June ISM prices-paid sub-index is expected to show a -2.0 point decline to 86.0, adding to May’s decline of -1.6 to 88.0. The prices-paid sub-index surged to a 13-year high of 89.6 in April and is currently only modestly below that level. The strong level of the prices-paid index shows how the U.S. manufacturing sector is being hit by high input prices, and is therefore under pressure to raise the price of final products coming out of the U.S. manufacturing sector.
The Fed has insisted that the current inflation surge will be transitory. The markets will continue to watch leading inflation indicators such as the ISM manufacturing prices-paid index to see whether underlying inflation pressures in the economy may soon start easing.
