Non-Farm Payrolls Preview: Pick a number…

Record-breaking numbers

In contrast to all expectations, the May release showed the headline increasing by 2.5 million jobs versus consensus forecasts of a loss of 8 million, with the previous number revised to a loss of 20.5 million. So, while the April payroll number was the worst in history, the following month was the best ever when looking purely at net job creation. This barely credible surprise was illustrated by the fact that none of the 70 economists surveyed by Bloomberg predicted a positive headline number.

The positive payroll figure in turn saw the unemployment rate fall to 13.3%, the second highest number since the second world war. However, the BLS estimated that this rate would have been 3% higher due to some workers being classified as employed but ‘absent from work due to other reasons.’ All-in-all, the numbers told us that only 53% of the US population had a job, which although better than April, paints a pretty miserable picture.

The largest ever range of estimates

Jumping to this month, the consensus forecast is for +3 million jobs for the headline number and an unemployment rate of 12.5%. Average hourly earnings are expected to fall sharply, but this is down to a statistical effect with lower-income groups regaining employment and dragging the ‘average’ lower. The stunning difficulty of estimating labour data at present is shown by the range for the headline on Bloomberg which is between +0.5 million and +9 million.

Why such a huge spread in the headline? The old drivers for forecasting NFP have traditionally been loose at best, but now even more so. The employment sub-indices in the ISM reports have increased and suggest improvement for sure, but initial jobless claims have seen around 10 million people claiming assistance between the reference periods, so not pointing to job growth. Continuing claims have dropped by roughly one million meaning those people went back to work or their benefits ran out, though the numbers still remain historically very high. The latest Fed Beige Book also showed that economic activity deteriorated in some states.

It seems that clouding the whole picture are technical classification issues, as recalling already hired workers when businesses have been using the paycheck protection program and expanded jobless benefits is proving hard to account for. Job creation could just be down to this re-hiring as well as discouraged workers returning to the labour force, while permanent job losses are increasing due to bankruptcies.

Improving labour markets, so v-shaped?

Allowing for all the technicalities and complications, the re-hiring process has begun with the gradual reopening of the economy. The underlying trend should be positive, but the stubbornly high claims numbers do suggest some momentum in employment gains is being lost. And even a big employment rise of say 5 million still means total payrolls remain roughly 15 million below pre-pandemic levels.

Markets may then just shrug at the report, with initial spikes in volatility on any outlying headline figures. Net short positioning in the greenback increased last week and remains at two-year plus highs due to economic re-opening concerns and an overabundance of dollar liquidity. Meanwhile, the S&P 500 is pivoting around its 200-day moving average amid growing concern about the ‘FAANG’ leadership. Seasonal trends suggest some volatility in risky assets as we head into summer.