COVID-19 Resurgence to be Weighed in July Data

The coming week’s July data will be scrutinised for any early effects of the COVID-19 resurgence, with the highlight of the week being Friday’s monthly employment report.

The combined 7.5 million payrolls gain in May and June only began to scratch the surface of offsetting the 22.2 million total decline seen in the first two months of the shutdown – but it was a start. Analysts expect another large increase in payrolls in July, but there is some risk of a disappointing number. While the level of initial unemployment claims continued to trend downward in the month, it is still stubbornly high.

It is likely that the services sectors – particularly retail businesses and restaurants – will lead the monthly increase, still digging out from the deep hole in the early spring, however, some of those re-hires could be temporary if the re-opened businesses do not find a firm footing. More importantly, the resurgence of COVID cases, which came too late to be reflected in the June data, will have an impact on July payrolls levels across much of the country.

Ahead of the Friday report, the ADP report will be released Wednesday morning. For June, ADP had predicted private payrolls would rise by 2.4 million, below the 4.8 million increase reported by the BLS. ADP had also underestimated the May rebound, originally looking for a sharp decline before a large upward revision.

Unemployment Rate Dips, Special Factors Diminished

The unemployment rate should decline further in July from the 11.1% rate in June, but there are still issues that could reduce the size of the decline. Signs that the economy improved drastically in June pushed more workers back into the labour force in July. Some found jobs right away, but many did not, which will add to the number of household unemployed, and if the improved economic conditions were not enough to motivate sidelined workers, the expiration of enhanced unemployment benefits on July 31 likely pushed others to look for a job in the month.

Additionally, the error cited by the BLS in past months that mis-labelled some temporarily laid-off workers as “employed and absent” rather than unemployed, artificially depressing the unemployment rate in the process, appears to have been resolved.

The error caused only a 1-percentage point underestimate in June after a 3-percentage point underestimate in May. If the error was eliminated entirely, the rate will not be deflated as it was in previous months.

Average hourly earnings should decline for a third straight month, still coming down from the spike in April when lower-income earners were disproportionally laid-off at the start of the crisis.

Regional Manufacturing Data Positive, Services More Mixed

The regional manufacturing data for July point to another increase in the national ISM index when it is released on Monday. The ISM’s measure moved up to 52.6 in June from 43.1 in May, the first reading above the breakeven point since February. While most of the regional indicators improved in July, the Dallas Fed’s index indicated further contraction. Texas was one of the key states hit by a resurgence of COVID-19 cases in July.

Markit will update its July manufacturing estimate earlier Monday morning. The flash estimate showed an increase to 51.3 in July from 49.8 in June. The outlook for the hard-hit services sector is less clear. The ISM’s services (previously called non-manufacturing) reading rose to 57.1 from 45.4 but may pull back in July when it is released on Wednesday.

The Dallas Services reading fell back sharply to -26.7 in July from 2.1 in June, owing directly to the resurgence of COVID-19 cases. Additionally, the Richmond Fed’s services reading remained negative at -14 in July and the flash Markit reading was slightly below its breakeven point at 49.6. At the same time, though, the services measures from the Philadelphia Fed (0.7) and Kansas City Fed (20) indicated expansion.

On Friday, the ISM will introduce a new series on hospital business conditions, a suitable addition in the current environment.

Jobless Claims Stubborn in the Face of Stimulus End

Initial jobless claims rose by 12,000 to 1.434 million in the July 25 week, a second straight increase after a long string of diminishing declines. The level is likely to remain near the recent range in the August 1 week, with the typical July seasonal adjustment issues moving out of the picture.

The expiration of the enhanced jobless benefits on July 31 (barring a last-minute agreement) should have little impact on the current week’s data, but could trim initial claims going forward if displaced workers decide not to enter the long backlogs to receive only the state benefits.

An extension of the enhanced benefits, on the other hand, could lift filings if there is anyone that has delayed their enrollment to this point. That pool is not likely very deep, and any initial filings gain will continue to reflect backlogs being worked down.

Low Rates Support Vehicle Sales, But For How Long?

Industry vehicle sales should get another boost from low interest rates in July, but unlike grocery shopping, vehicles are not a regular purchase. Pent-up demand from March and April translated into sharp vehicle sales gains in May and June, letting some air out of the balloon.

As a result, a further increase in July is unlikely to be as impressive as in previous months. In fact, some areas hit by the resurgence of COVID cases could see declines as potential buyers chose to stay away from dealerships out of safety concerns.

Treasury Borrowing to Spike on Stimulus Payments

The Treasury Department’s borrowing estimates and quarterly refunding announcement will reflect the massive outflow of stimulus money over the last three months and the expectation of further measures going forward. Treasury said at their last quarterly refunding that it would need to increase its long-term issuance over the next few quarters to meet its increased spending needs and manage its maturity distribution after initially boosting bill issuance.

The Treasury will announce its borrowing requirements on Monday and release its quarterly refunding details on Wednesday.


Colin Lambert

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