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After 20 Million Jobs Drop, What’s Next?

The US April data were, in a word, horrible. There was no silver lining, except that it was, hopefully, the worst we will see and that some relative recovery began over the last few weeks.

The May business conditions data already released continued their downward trend, but the pace of contraction was, in the main, much less severe than in April. In addition, the readings of consumer confidence improved modestly in May, but remained below their pre-crisis levels, and the level of new unemployment filings continued to trend lower, but remained in the millions.

In short, what would have previously been labeled as disappointing has now become a modest relief.

With that in mind, the June 1 week’s data schedule will include the first wave of top-level May data, none more important than the monthly employment report.

Non-farm payrolls fell by 20.5 million in April, with practically every sector producing massive job losses. At the same time, the unemployment rate jumped to 14.7%, the highest since the Great Depression (starts with a D, not an R). State-level data released later showed that no state was spared from this misery.

Friday’s May employment data will likely disappoint as well, with payrolls falling further and the unemployment rate remaining elevated. However, the shock value that came with April’s report has faded. After weeks of multi-million additions in initial jobless claims, a seven-figure drop in payrolls will not raise an alarm.

As with the April decrease, service sector jobs will continue to be the hardest hit. Some states moved toward reopening in the latter half of the month, allowing some nonessential retail businesses to open their doors. The question is whether that activity came too late to be picked up for Friday’s release.

Even if the retail sector shows some signs of job recovery, hotels and restaurants remain, for the most part, shuttered. The leisure and hospitality sector may need to wait for June at the earliest to see a significant improvement.

The manufacturing and construction industries will post further payrolls losses in May. Given that they were deemed essential in most areas, and were beginning to ramp-up, a smaller decline seems likely in the June report.

The unemployment rate will move higher in May, but there are two competing factors that will determine the severity of the increase.

There were further layoffs among companies that were able to hold off on cutting their payrolls until May. Conversely, there are likely to be many discouraged workers that left the labour force in April and May rather than job hunt in the worst market in years.

Average hourly earnings surged by 4.7% in April, as most of the job losses occurred in the lower income occupations, lifting the average. Earnings are likely to move higher in May, but the monthly increase will be smaller due to the higher base set in April.

Forecasts for Friday’s data will be modified after Wednesday’s ADP release, which closely predicted the large private payrolls decline in the month.

In addition, Challenger will release their layoffs report for May on Thursday after a record spike in April. Layoffs at smaller firms are likely to prove permanent, particularly in the services industries.

ISM will release their May data this week – manufacturing on Monday and non-manufacturing on Wednesday. Regional conditions data, except for the Chicago PMI, pointed to a slower, but still brisk, pace of contraction for both the manufacturing and non-manufacturing sectors.

However, the six-month outlooks have been more mixed, with some regions expecting solid improvement by year-end, while others suggest that recovery may not be seen until 2021.

Motor vehicle sales for May, released on Tuesday, will further disappoint. Social distancing kept buyers mostly out of dealerships in April and May, and while online transactions have helped keep other retail sector businesses operating relatively smoothly, it is hard to imagine the same benefits for car buying.

Initial jobless claims data on Thursday should maintain the existing trend, with progressively smaller, but still impressive, gains in initial filings adding to the number receiving benefits.

It was a pleasant surprise that continuing claims declined in the May 16 week, suggesting some job recovery. However, until there is a substantial reopening of businesses across the country, unemployment rolls will remain near record levels.

The remainder of the data releases in the coming week will be backward-looking, reflecting the significant weakness in April.

Home building activity fell sharply in April, which will translate into a large decline in private residential construction spending in Monday’s report. In March, home remodeling was the driving force in a surprise construction gain. The same could occur in the April report, as homeowners opted to use their increased time at home to make improvements.

Non-residential building will also decline and could see further contraction as many businesses consider the benefits of virtual workspaces after the recent forced trial.

Factory new orders are expected to fall sharply, based on the 17.2% decline in durable goods new orders released Thursday morning. Non-durable goods orders will not provide an offset either, as plunging energy prices cut into the value of petroleum and coal products orders.

Factory shipments, likewise, should be down on declines in both durable and non-durable goods. Durable goods shipments fell 17.7% in the month.

The advance trade report for April showed the Census goods gap widened in the month, with imports and exports both down sharply due to the continuation of trade barriers. The full trade report released on Thursday will paint a similar picture.

The revised estimate of first quarter non-farm productivity will also be released on Thursday. The output component should be roughly unrevised following the minor adjustment to the GDP data, while unit labor costs should be revised modestly higher.

Consumer credit use is expected to slow in the April release, reflecting widespread sales declines that will impact both revolving and non-revolving credit usage. The one upside was online purchases, which should give support to credit card spending in the month.

Kevin Kastner


Julie Ros

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