Risks in This Week's Key US Economic Data

The markets face key US economic data this week.  And, the risks to the consensus estimates are to the downside in some cases.  The stock market won't necessarily react negatively if this turns out to be the case.  Soft data would argue for steady Fed policy ahead.  And, last week's comments by important Fed officials suggest steady policy for the next several months is likely.  The September FOMC Meeting may be the earliest when tapering of bond buying is discussed, in part because there may be more clarity about further fiscal stimulus (or drag) at that time.

The consensus estimates for the May Employment Report risk being too strong.  Nonfarm Payrolls are seen climbing 650k m/m after the disappointing +266k in April.  The Claims data are not fully supportive of this estimate, however.  Initial Claims show a sharper drop in layoffs leading into the May Payroll Survey Week than into the April Week.  The 4-week average fell by 155k between the April and May Survey Weeks, compared to -89k between the March and April Weeks.  But, Continuing Claims have stalled since April, suggesting that either hiring fell or people refrained from getting a new job in response to the increased Unemployment Benefits -- thereby offsetting the decline in layoffs.  So, the risk is that the improvement seen in Initial Claims is overstating the implication for May Payroll strength.

Similarly, the consensus estimate of a decline in the Unemployment Rate to 5.9% in May from 6.1% in April is too optimistic.  The Insured Unemployment Rate, which is calculated on the basis of Continuing Claims, was steady between the April and May Survey Weeks.  

In contrast, the consensus estimate of a slowdown in Average Hourly Earnings to +0.2% m/m in May from +0.7% in April risks being too low, based on the anecdotal evidence of labor shortages and large companies hiking wages as a result.

Consensus looks for a steady 60.7 May Mfg ISM.  The evidence from other manufacturing surveys is mixed.  While Markit Mfg PMI rose in May, the Empire State Mfg Index fell.  None has a reliable relationship with the m/m direction of the Mfg ISM.  Both of these missed in April.  Shortages and other bottlenecks could hold down the latter.  But, demand remains strong.  So, even if it dips, the Index should be at a high level.