Disappointing U.S. Jobs Data, Despite a Big Payroll Gain

The June jobs report revealed an upside surprise for payrolls, but it came alongside a big workweek drop and a shift in jobs toward low-paid workers, leaving a lower trajectory for hours-worked, and hence a weaker June path for economic activity than assumed. The wage data were a tad stronger than assumed in June, but were revised down in May, leaving only a slightly stronger than assumed path. The household data undershot assumptions. Overall, the report reveals downside risk for near term outlook, despite firm payroll data.

Today’s data trimmed prospects for the other June reports, and we have lowered our Q2 GDP growth estimate to 7.3% from 7.6%, though our Q3 GDP estimate remains at 7.0%. The mix leaves a likely Q4/Q4 2021 GDP gain of 6.4%.

Payrolls have now reclaimed 70% of the jobs lost in March and April of 2020. Hours-worked have reclaimed a larger 78% of the drop. The larger workweek surge means that hours have been recouped by fewer workers working longer hours. The GDP rise through Q1 has reclaimed 92% of the Q1-Q2 drop, with an extra productivity boost. We now expect June gains of 0.5% for industrial production and 0.4% for construction spending, but declines of -0.8% for retail sales, and -1.0% for personal income.

For the report specifics, we saw an 850k nonfarm payroll gain that beat estimates after 15k in upward revisions, with only a 20k goods sector rise alongside a big 642k service job gain that was led by a 343k surge for likely low-paid jobs in the leisure and hospitality component. We now have nonfarm payroll gains of 583k (was 559k) in May and 269k (was 278k) in April.

We saw a 662k private payroll rise after 31k in upward revisions. Government jobs rose a hefty 188k after -16k in downward revisions. We saw a huge 230k rise in state and local education employment that more than accounted for the June government increase.

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The workweek fell to 34.7 from 34.8 (was 34.9) in May and two prior months at 34.9, after a 34.6 figure in February. We saw a 21-year high of 35.0 in January that was seen through much of 2000. Low-paid workers are returning to work to displace the hours of high-paid workers.

We saw a lean 0.2% hours-worked rise after gains of 0.2% in both May (was 0.5%) and April. The mix left a surprisingly weak path, with a big Q2 hit from the May revision.

For the goods sector breakdown, we saw gains of 15k for factories and 12k for mining, but a -7k drop for construction. The goods sector revealed a -0.6% hours-worked drop, with declines of -0.3% for factories and -1.1% for construction, but a 2.2% rise for mining. We saw a 0.4% hours-worked rise for the private service sector.

The 0.3% May hourly earnings rise followed hefty gains of 0.4% (was 0.5%) in May and 0.7% in April. The y/y hourly earnings rise climbed to 3.6% from 1.9% (was 2.0%) in May and 0.4% in April, leaving a climb that is mostly due to base effects, given an 8.2% y/y peak in April of 2020 that was gradually unwound over the ensuing months.

The household data undershot assumptions, leaving a jobless rate rise. We saw a -18k June drop for civilian jobs and a restrained 151k rise for the labor force, following respective May swings of 444k and -53k.

The jobless rate rose 5.9% (5.89%) from 5.8% (5.79%) in May, versus a 14.77% peak in April of 2020. We saw a 3.55% low from the last cycle in December of 2019 and a 9.98% prior cycle-high in October of 2009.

The labor force participation rate sustained the May drop to 61.6% from 61.7% in April, versus a 48-year low of 60.2% in April of 2020 that marked the lowest readings since February of 1972.

Jobs Data and the June Forecasts

For the jobs data impact on other June reports, we expect a -1.0% personal income drop that extends declines of -2.0% in May and -13.1% in April, as we reverse the 20.9% March surge. We expect a 0.5% June rise in compensation after a 0.7% gain in May. We expect a -6.4% June drop in “current transfer receipts” after declines of -11.7% in May and -41.2% in April, as we reverse the 95.1% March surge. We expect a savings rate drop to 11.2% from 12.4% in May, versus a 27.6% peak in March and a 13.1% recent-low in November. We saw prior peaks of 20.7% in January and 33.7% in April of 2020. We peg disposable income growth at -23.7% in Q2 after a 68.0% Q1 surge.

Industrial production is poised for a weather-boosted 0.5% June gain, after a 0.8% May rise. Hours-worked fell by -0.3% for factories but rose by 2.2% for mining. We expect a 0.2% manufacturing rise with an assumed vehicle assembly rate uptick to 10.0 mln from 9.9 mln. We expect a 1.0% mining rise and a 2.0% utility gain due to hot weather. We expect a 6.3% industrial production growth rate in Q2, after rates of 3.6% in Q1 and 8.2% in Q4.

For construction, we saw a -7k June payroll drop with a -1.1% hours-worked decline. We expect a 0.4% June construction spending rise after a -0.3% May drop. Construction is receiving a lift from the new residential construction sector boom, but with big hits from declines in public and nonresidential construction that are holding down aggregate construction sector growth.

Jobs Data and Q2

For the jobs data impact on the quarterly outlook, the monthly hours-worked figures posted a 4.5% Q2 growth clip, following a restrained 3.2% pace in Q1. The hours-worked data prompted a downward bump in our Q2 GDP estimate to 7.3% from 7.6%, though we still assume Q2 GDP growth of 7.0%.

We expect productivity growth of 4.5% in Q2 after the 5.4% Q1 gain. We expect hours-worked growth in the productivity report of 4.8% in Q2 after a 3.0% Q1 pace. We expect 9.3% Q2 growth for the BLS output measure after an 8.6% Q1 pace.

We expect a flat Q2 figure for unit labor costs (ULC) after a 1.7% Q1 clip. We expect 4.5% Q2 growth for compensation per hour after a 7.2% pace in Q1.

The annual productivity gains in 2019 and 2020 mark the strongest increases since 2010, and we’re on track for another big gain in 2021.

We assume that job increases will stay solid into Q3 with lingering support from vaccines and stimulus spending, after the winter lull that was aggravated by a coronavirus surge. We expect an average monthly payroll gain of 550k in Q3, after averages of 567k in Q2, 518k in Q1, and 213k in Q4.

The workweek is fluctuating in the pandemic around historically high levels, as the mix of employment has moved away from low-paid work that often involves part-time work and short hours. We assume the workweek will remain in the elevated 34.7-34.9 area until restaurants, hotels, airlines, and entertainment are more fully reopened.

Payrolls vs Other June Labor Market Indicators

A big June payroll gain, despite hours-worked restraint, was signaled by solid Q1-Q2 production and retail sales gains, a firm ADP path, a continuing claims downtrend, a housing boom, and robust sentiment. Vehicle sales remain heavily inventory constrained with big declines into June, as assemblies struggle to rise with ongoing semiconductor shortages.

Initial claims continue to trend lower, though the downtrend in continuing claims has flattened since March. Initial claims have averaged 394k in June, after averages of 428k in May, 582k in April, and 724k in March. The 444k June BLS survey week reading undershot recent survey week readings of 444k in May, 566k in April, and 765k in March.

Continuing claims fell by -198k between the May and June BLS survey weeks, after drops of -42k in May, -188k in April, -628k in March, and -409k in February. Continuing claims peaked at 23,128k in May of 2020, before falling to 3,469k by the most recent week.

The ADP report revealed a 692k June rise that beat the 662k private payroll increase by 30k, following big “as reported” overshoots of 462k in May and 516k in April, undershoots of -207k in March and -505k in February, but overshoots of 52k in January and 151k in December. We saw a previous 8-month stretch of undershoots.

We assume that the vehicle assembly rate rose to 10.0 mln in June from 9.9 mln in May, with a continued headwind from semiconductor shortages. The vehicle sales rate fell about -10% in June to the 15.4 mln area, as sales further unwound the prior climb to a 16-year high of 18.8 mln in April that beat the 17.9 mln prior peak in September and October of 2017. We saw an all-time low of 8.7 mln in April of 2020 for a series that dates back to 1976.

The producer sentiment indexes climbed to remarkable highs over the March-May period, alongside rapid distribution of vaccines and the two massive Q1 stimulus distributions, before moderating slightly, on average, in June.

The ISM-adjusted average of the major sentiment surveys slipped to 60 in June from a 61 all-time high over the three months through May, versus a record before that of 59 in three months of 2018 for a series we’ve calculated back to 2004. We saw a 61 average in Q2, after averages of 59 in Q1, 57 in Q4, and 55 in Q3.

The FOMC

The June 15-16 FOMC statement and press conference seemed to accelerate the timetable for the Fed’s move toward tapering, and today’s solid jobs data may solidify that shift. Yet, beyond the change in rhetoric in June, we still assume that the FOMC will prefer to stall with its tapering move until the start of 2022, with an announcement in September or November. Big boosts in the official Fed forecasts for growth and inflation in June leave room for downgrades in at least the growth outlook in September, and Fed rhetoric going forward will likely highlight the downtrend in the various y/y inflation metrics from Q2 peaks. The Fed will face diminished pressure to tighten as we approach the next set of SEP revisions in September, and we assume that most policymakers are in no hurry to actually start tapering.

The Fed’s official growth forecasts were lifted sharply at both the March and June FOMC meetings. The Fed’s 2021 central tendency for GDP was raised to 6.8%-7.3%, versus our own 6.4% estimate, while the jobless rate central tendency was raised to 4.4%-4.8%, versus the current 5.9%. The Fed’s 2021 central tendencies for the PCE chain price indexes sit at 3.1%-3.5% for the headline and 2.9%-3.1% for the core, versus our own respective forecasts of 3.4% and 3.1%.

The Fed faces opportunities to tweak market perceptions on the timing of Fed tapering at the July 14 Congressional testimony, the July 27-28 FOMC meeting, and the August 26-28 Jackson Hole conference. Though the more aggressive dot plot suggests that a growing pool of policymakers are willing to start the rate hiking cycle by the end of 2022, the Fed has room to drag its feet on an announcement of QE tapering.

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