Data Preview: August Payrolls, Hurricane Laura Top of Mind

The impact of Hurricane Laura, which ripped through the Gulf Region on Thursday and is carving its way up the middle of the US as we speak, will be felt in the weekly initial claims and rig count data next week and could also affect retail sales and other data released later in the month.

What the hurricane will not impact is Friday’s August employment report, which closed its survey period long before the hurricane even formed. But that doesn’t mean the report will be favourable.

Nonfarm payrolls have been offsetting their large March and April declines over the last three months, but the rate of growth slowed in July. The pace could decline further with the August data as government stimulus money runs out without a clear sign of renewal and COVID cases continue to flare up in some regions.

As in past months, the services sector should be the key to overall payrolls growth, with the factory and construction sectors posting modest increases. However, many states needed to move backward in their reopening stages in August, which will have an outsized impact on the leisure and hospitality categories.

Ahead of the Friday report, the ADP report will be released Wednesday morning. For July, ADP had predicted private payrolls would rise by only 167,000, well below the 1.5 million increase reported by the BLS. ADP had also underestimated May and June private payrolls before revisions.

End of enhanced jobless claims could boost unemployment rate

The unemployment rate was tantalisingly close to slipping back into single digits in July, falling to 10.2%. The hope is that it will break through that barrier in August, but there is a big factor standing against it — the expiration of the federal government’s extra $600 jobless benefit on July 31.

Those that did not search for new work while collecting the enhanced benefits likely poured into the labour force in August. Some may have found jobs within the month, but many did not. The result could be an uptick in the unemployment rate rather than a further decline.

Average hourly earnings should post another increase after July’s small gain. The pullback in state re-openings will hit lower wage earnings hardest and, as with the first round of shutdown, pull them out of the equation.

Regional manufacturing data mixed, services positive

The regional manufacturing data for August were mixed, but still point to another increase in the national ISM index when it is released on Tuesday. The ISM’s measure moved up to 54.2 in July from 52.6 in June.

The Empire State and Philadelphia Fed measures declined in August, while the other regions released to this point moved higher, but all indicate expansion.

The only regional manufacturing data still to be released is Monday morning’s reading from the Dallas Fed. It rose to -3.0 in July from -6.1 in June, indicating less widespread contraction last month.

In addition, Markit will update its August manufacturing estimate earlier Tuesday morning. The flash estimate showed an increase to 53.6 in August from 50.9 in July.

The outlook for the services sector is more positive than for the manufacturing sector. The ISM’s services (previously called nonmanufacturing) reading rose last month to 58.1 for July from 57.1 for June. The regional data to this point suggest another solid reading for August when the data are released on Thursday.

Prior to that, the Dallas services reading will be released Tuesday morning. It fell to -26.7 in July from +2.1 in June due to a resurgence of COVID cases, a situation that has not improved significantly in the last month.

Markit will update its August reading just before the ISM release on Thursday. In the flash estimate, Markit said its services reading rose to 54.8 from 50.0 in July.

Manufacturing and Nonmanufacturing Conditions
Sources as listed

Hurricane Laura, methodology adds uncertainty to claims

Initial jobless claims have moved to a slightly lower plateau in recent weeks, but remain above one million even as enhanced benefits have expired. A positive sign is the downward trend in continuing claims after the initial spike. The level of both remain elevated.

The effects of Hurricane Laura will be partially seen in the current week’s data, but the greater impact is likely in the following week.

Based on claims data during past hurricanes, the level of initial filings is likely to slip first as filing locations are closed, followed by a spike in the following weeks as some are put out of work by temporary shutdowns in affected areas.

While this year’s trend toward online filing may minimise the early effects somewhat, the hurricane is still likely to slow down processing of claims in the current week’s data and boost it after processers in those areas are able to safely return to work.

In addition, a methodology change in next week’s data could result in a break in the series, but will also mean more accurate readings going forward. So, if you see a large shift in the level of claims next week, this change is likely a big part of it.

The Labor Department announced that it will begin using an additive seasonal adjustment factor rather than the multiplicative factor that has been historically used. Labor noted that the usual seasonal factor process is appropriate for times of economic stability, but this is not one of those times.

With the large and sustained shift in initial claims this year, Labor said that a multiplicative factor could result in over- and under-adjustments to the series. In contrast, an additive seasonal factor should better track seasonal movements and result in smaller revisions. See this website for more information:

For a market posture snapshot, the cap-weighted SPX is on pace to end the week above its post-June channel of higher highs and lows:

Kevin Kastner

Julie Ros
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Julie Ros

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