Will the May Employment Report Be As Bad As Feared?

There were signs at the end of last week that the stock market was beginning to react to the slow start of the economy's recovery.  And, this reaction may continue into this week, particularly since the weekend protests in some cities work against the recovery.  But, the market soon may be getting evidence of a speedup in the economy's re-opening.  With GM moving to full production of trucks this week and New York City beginning to open the following week, both Initial and Continuing Claims should soon begin to fall at a more rapid pace.  This week, the markets may get a boost from a stronger-than-consensus May Employment Report.

Consensus looks for -8.25 Mn m/m in May Payrolls and a 5.0% pt jump in the Unemployment Rate to 19.7% from 14.7% in April.  The Claims data, however, suggest Payrolls risk falling by a smaller amount and the Unemployment Rate rising by less than consensus.

The table below shows the change in Continuing Claims between Payroll Survey Week.  It also shows the cumulative change in Initial Claims between these weeks.  Both April Payrolls and Unemployed People were more closely aligned with Continuing than Initial Claims.  This makes sense, since Initial Claims do not capture re-hired workers while Continuing do.

Taking the May change for Continuing and adding the 4 Mn underestimate in April points to -7 Mn for May Payrolls.  Continuing also points to a 2% pt increase in the May Unemployment Rate to 16.7%.

To be sure, historically the relationship between either Continuing or Initial Claims and Payrolls and Unemployed is not so exact.  There are too many other labor market flows that the Claims data do not capture directly.  So, these calculations should be viewed only as suggestive of the risk in Friday's prints.

The historical evidence is mixed whether Wednesday's ADP Estimate will underestimate Private Payrolls.  The May ADP Estimate reversed direction of the April miss in each of the past 3 years, suggesting ADP will be too high (a smaller negative) in May after it was too low in April (-20.2 Mn versus actual -19.6 Mn).   But, ADP was too low in both April and May in each of the prior 3 years, suggesting it will underestimate May Private Payrolls (be more negative than Payrolls).  

The other important US economic data this week will be the May Mfg ISM.  Most other mfg surveys showed a modest improvement this month.  So, the consensus estimate of a small increase to 43.0 from 41.5 in April is reasonable.  The one counter evidence was the further decline in the May Chicago PM.  However, there are reasons to discount it.  The two moved in the same direction in only 2 of the past 6 months, correct when the economic shutdown was dominant in March and April.  The shutdown was probably more dominant in Chicago than the whole country in May.  Chicago still hadn't re-opened businesses that month.  Also, the Chicago PM covers non-mfg as well as mfg companies in the Chicago area. 

                              (Change from the Prior Month's Level in the Payroll Survey Week)
                      Continuing Claims          Initial Claims*          Payrolls          Unemployed
April                     16.2 Mn                       26.4 Mn                    -20.5 Mn              15.9 Mn

May                        3.0                              12.2                              na                        na

* cumulative change between survey weeks.