This Week's Key US Economic Data

The stock market is being pulled in opposite directions by fear of the virus' impact on the economy and evidence of a V-shaped recovery.   This week's key US economic data -- particularly the June Mfg ISM and Employment Report -- could play an important role in this battle.   Evidence suggests they will support the idea of a strong recovery, but there are some caveats.   Strong prints should boost stocks.  But, a significant market rally may need to see signs that the coronavirus infection rate has stopped rising.  And, then, concerns about the outcome of the Presidential election will likely be a restraint.

The June Mfg ISM risks printing above 50.0, above the 49.0 consensus estimate.  The Phil Fed Mfg Index jumped to +27 this month, a level that was consistent with 50+ prints in the Mfg ISM.  Also, while the June Markit Mfg PMI barely missed a "5" handle with a 49.6 print, it has been lower than the Mfg ISM in each of the past 3 months.   To be sure, it is not a reliable predictor, evenly split between being higher or lower than the Mfg ISM in the prior 14 months.

The June Employment Report risks showing a speedup in Payrolls and a decline in the Unemployment Rate, with one caveat.  The Claims data suggest that layoffs slowed while re-hirings rose since May.  This combination presumably was behind the decline in Continuing Claims between the May and June Payroll Survey Weeks.  It should show up in a speedup in jobs and a decline in unemployment.  Consensus is consistent with this expectation.  It looks for +3.0 Mn Payrolls versus 2.5 Mn in May and a decline in the Unemployment Rate to 12.3% from 13.3%.

A caveat is that the May Employment Report was stronger than Claims data had suggested.  Claims correctly predicted a stronger Payroll print in May than in April.  But, the +2.5 Mn m/m jump was out-sized relative to the Claims data, suggesting these data did not fully reflect all the flows in the labor market.  It is conceivable that these unmeasured flows could unwind in June, thereby holding down the Payroll gain.

Similarly, the Claims data predicted a smaller increase in the Unemployment Rate in May than in April.  It did not predict the decline that printed.  BLS argued that some furloughed workers were incorrectly classified as employed rather than unemployed, which may explain the surprising decline in the Rate.  But, adjusting for this possible mistake did not make the Unemployment Rate closer to Continuing Claims in March or April (see my June 14 blog).  So, again there may have been labor market flows not captured by the Claims data that were behind the decline in the May Unemployment Rate.  These unmeasured flows could reverse in June, thereby lifting the Rate.

Another possibility is that BLS could try to educate its surveyors to classify furloughed workers as unemployed.  If so, it could add to the June Unemployment Rate.  Generally, BLS does not revise past months' Unemployment Rates until December and January (the latter of the following year).