- Payroll growth expected to rebound but remain weak
- Consumer credit expected to show a below-trend increase
- UK Conservative Party leadership contest is now between May and Leadsom
Payroll growth expected to rebound but remain weak — The market is expecting today’s June payroll report to show an increase of +180,000, improving significantly from May’s increase of only +38,000. The Verizon strike knocked 35,000 jobs off the May payroll report, but virtually all of those jobs should come back in today’s report for June. That means that today’s June payroll report will be overstated by about +35,000 and that the market consensus ex-Verizon is actually about +145,000. The 6-1/2 week Verizon strike started on April 13 and was settled on May 29.
Yesterday’s ADP report was favorable at +172,000, which was better than market expectations of +160,000. There were only small downward ADP revisions for May by -5,000 to 168,000 (from +173,000) and for April by -17,000 to 149,000 (from +166,000). Yesterday’s ADP report suggested that hiring is not falling apart and that today’s payroll report should show a decent increase.
An ex-Verizon June payroll report today of +145,000 would be less than impressive but would certainly be an improvement from May’s very poor +73,000 ex-Verizon report. May’s very weak payroll report threw the Fed for a loop and raised questions about whether the U.S. economy is experiencing a sustained slowdown in hiring. Payroll growth was strong at +233,000 in February, but then fell to +186,000 in March, +123,000 in April, and +38,000 in May.
A slowdown in hiring would not be surprising given the year-long corporate profit recession and the need for businesses to trim expenses. In addition, businesses have reduced incentives to hire more employees due to poor labor productivity and rising wages. A sustained slowdown in hiring could snowball into reduced consumer confidence and spending and even into a recession down the road if the hiring slump becomes more severe.
Meanwhile, the market is expecting today’s June unemployment rate to rise by +0.1 point to 4.8% following May’s surprise -0.3 point drop to an 8-3/4 year low of 4.7%. The unemployment rate in May actually already fell to the FOMC’s forecast for a 4.7% unemployment rate by year-end and was only +0.1 point above the FOMC’s forecast for an unemployment rate of 4.6% for late-2017 and late-2018.
The unemployment rate has therefore essentially already met the Fed’s idea of full employment. However, May’s drop in the unemployment rate to 4.7% was less than impressive since it came mainly because of a decline in the size of the workforce rather than from a surge of new jobs. Indeed, the labor force participation rate in May of 62.6% was only +0.2 points above the 39-year low of 62.4% posted in late 2015. The low labor participation rate indicates that the ratio of the U.S. population that is participating in the labor market (as either employed or looking for a job) is near the lowest level in 39 years. That low participation rate is partially due to people being discouraged about looking for a job but the main reason for the low participation rate is demographics with baby boomers starting to retire.
Meanwhile on the wage front, the market is expecting today’s June average hourly earnings series to improve to +2.7% y/y from +2.5% in May. The expected report of +2.7% would take out the current 6-3/4 year high of +2.6% posted in Oct 2015. A new 6-3/4 year high in hourly earnings would be a positive sign for the economy since it would indicate higher earnings for many consumers that would translate into higher spending and savings.
Consumer credit expected to show a below-trend increase — The market is expecting today’s May consumer credit report to show an increase of +$16.25 billion, which would be an improvement from April’s weak report of +$13.416 billion but still below the 12-month trend increase of +$17.6 billion.
A year ago, U.S. consumer credit growth was dominated by strength in installment loans for school and vehicles. Specifically, a year ago in April 2015, U.S. installment loan growth was very strong at +8.1% y/y whereas revolving credit (credit cards) growth was up by only +4.1% y/y. However, consumers have been relying more on credit cards in recent months and revolving credit growth has risen to +5.5% y/y, while installment loan growth has decelerated to +6.5% y/y.
The recent increase in revolving credit is a sign that consumers are willing to climb a little farther out on the credit limb in order to support their consumer purchases, which is a good sign for the economy as long as consumers don’t get overextended on debt. Meanwhile, installment loan growth is likely to fade a bit more in coming months due to weaker vehicle sales. U.S. vehicle sales in June fell by -4.4% m/m to 16.61 million units from 17.37 million units in May and were down -2.0% y/y. Auto sales in June were very weak at -11.7% y/y while truck sales decelerated to +5.6% y/y from recent levels near +12%.
UK Conservative Party leadership contest is now between May and Leadsom — The UK is slowly moving ahead with the Brexit process as a preliminary vote narrowed the choice for the new Conservative Party leader (and future prime minister) to Home Secretary Theresa May and Andrea Leadsom. It was rather ironic that Justice Secretary Michael Gove, who pushed hard for Brexit and ejected Boris Johnson from PM consideration, had a poor showing in the leadership vote and was eliminated. Ms. Leadsom is pitching herself as the pro-Brexit candidate while Ms. May says she will proceed with Brexit as well and try to get the best deal possible. Ladbrokes has Ms. May at 1/5 odds (83% probability) to win the leadership contest and Ms. Leadsome at 7/2 (22%). The election results will be announced on Sep 9.