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Will Employment Report Provide Early Fireworks?

Before the Fourth of July holiday, there are plenty of opportunities for the June US data to create further buzz after a partial recovery in May.

The employment report released Thursday – early because of the pending holiday – is undoubtedly the highlight of the week ahead of Friday’s observed holiday. May’s 2.5 million payrolls rebound started the slow and long recovery from March and April’s combined 22 million drop.

Now there is a chance for further improvement with the June data, or a chance for a disappointment. Initial jobless claims and continuing claims declined over the month, but the pace of decline slowed, and the levels remained extremely high, suggesting that a larger gain in payrolls is not assured.

It is reasonably expected, though, that the sectors that were hit the hardest by COVID – retail, restaurants, medical offices – will continue to rebound. The loosening of restrictions, which began in May, expanded in June, requiring businesses to rehire some of their furloughed workers.

Several states have seen a resurgence of COVID cases in late-June, but a return of some of the restrictions happened after the survey week and will not have an impact on the June data.

Ahead of Thursday morning’s release, the ADP report Wednesday morning will provide some direction for last minute forecast tweaks. There was a large miss in May, with the ADP report showing a 2.7 million private payrolls decline ahead of the BLS’s 3.0 million increase. However, the official May report was a large surprise to many, not just to ADP.

Unemployment Rate Influenced by Labour Market Return, Glitch

The unemployment rate should, given the return of economic activity, decline further. There are a few issues to consider that could work against that improvement.

First, discouraged workers that were waiting on the sidelines for the number of COVID cases to slow and the economy to improve likely jumped back into the labour market in June after a smaller reentry in May. Some may have found jobs right away, but most did not.

Second, an often-cited error that has impacted the rate over the last few months may have been remedied. The BLS said that a mislabeling of some temporarily laid-off workers as “employment and absent” rather than unemployed artificially depressed the rate by around 3 percentage points. If that glitch has been fixed, that would suggest the unemployment rate will be higher unless there was significant rehiring.

Average hourly earnings bounced around in recent months, first driven higher in April as lower income earners were disproportionally released at the start of the crisis, then declining in May as those workers were some of the first rehired. That downward trend should continue in June.

Initial Claims to Decline Further, But Pace Remains Low

The rate of decline in jobless claims remains a source of concern for economists, while the long string of weekly declines is a positive, new claims levels in excess of a million three months after COVID began is concerning and suggest repeat filings as workers regained jobs, then lost them again.

One bright spot in the most recent week’s data is that continuing claims moved below 20 million, the first benchmark showing significant improvement. It remains to be seen if the return to more stringent COVID restrictions in some hot spots will push more people back onto the unemployment assistance.

Manufacturing Data Point to Further ISM Increase

The regional data for June already released suggest a further improvement in the national ISM manufacturing reading released on Wednesday.

However, the regional data to this point also suggest that the headline index could remain below the 50.0 breakeven point.

Markit will update its June manufacturing estimate earlier Wednesday morning. The flash estimate showed a solid improvement to just below 50.0.

Ahead of those releases, the Dallas Fed will release its June manufacturing index on Monday and the Chicago PMI will be released Tuesday.

Consumer Confidence Continues Uptrend

The Conference Board’s measure of consumer confidence is expected to move higher after a small increase in May.

Earlier Friday, the Michigan Sentiment Index was revised down to a reading of 78.1 from 78.9 in the preliminary estimate, remaining ahead of the 72.3 May reading. Both the current conditions and future expectations indexes were revised down, but remained ahead of their May readings.

Vehicle Sales Get a Lift

Industry vehicle sales for June should improve further when they are released on Wednesday, with a further loosening of restrictions allowing for more foot traffic at dealers.

Low interest rates, stimulus checks, and pent up demand should give a further lift to vehicle sales, but as with home building, economic uncertainty will temper sales growth a bit.

FOMC Minutes Dated, But Will Provide Texture on Near Zero Rates

The FOMC meeting statement on June 9-10 reflected a belief that rates will remain near zero for the next two years, which first calmed, but then troubled, financial markets. Some worried whether the FOMC was merely being soothing – or if they had a crystal ball.

The minutes of that meeting will be released on Wednesday afternoon and will make for interesting reading.

Since that meeting, COVID-19 numbers have rebounded in some large states and the level of initial claims remains above 1 million, confirming the FOMC’s concern that the economic slowdown will not be as brief as some believed.

Kevin Kastner

Julie Ros

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