Orlando's Outlook: May jobs trend is our friend

06-06-2014

Bottom line This morning’s Labor Department report for May clearly demonstrates that employment has successfully hurdled the difficult winter and is back on a positive roll. Today’s in-line report for May at 217,000 new jobs marks the first time that we have enjoyed four consecutive months of 200,000 or more positions in 14 years, while the most recent four-month average of 231,000 jobs exceeds the solid 4-month pace from last August through November at 222,000. Importantly, we believe that this rebound is sustainable through year-end 2014, as 80% of the private job creation in May’s ADP report was centered in small- and mid-sized companies, and initial weekly jobless claims are running at a 7-year low. To be sure, all was not perfect with today’s jobs report: hours worked were flat, wage inflation rose by a tepid 0.2% and the labor force participation rate still sat at a 36-year cycle low of 62.8%. But with the brutal winter now looking like a pothole in the rear-view mirror, we believe that nonfarm payroll creation could grind higher at a consistent 200,000 monthly pace over the balance of 2014.

Nonfarm payroll growth steady as she goes May rose by 217,000 jobs, which was roughly in line with Bloomberg consensus estimates for a gain of 215,000 jobs. In addition, the Bureau of Labor Statistics (BLS) revised March and April lower by a combined 6,000 jobs. March’s preliminary increase of 192,000 jobs, which was revised up moderately to a gain of 203,000 last month, was left unrevised. April’s preliminary increase of 288,000 jobs was revised down slightly to a gain of 282,000 last month. So the 4-month average gain of almost 231,000 new jobs through May is nearly triple December’s hugely disappointing, weather-impaired final gain of only 84,000 jobs, and it now exceeds the 222,000 job average generated over the 4-month period from August through November 2013.

Private payrolls solid May posted a solid gain of 216,000 jobs, which was slightly above the Bloomberg consensus forecast for a gain of 210,000 private jobs, and the BLS lowered 5,000 positions in March and April. March’s preliminary gain of 192,000 jobs, which was revised up slightly to a gain of 202,000, was revised back down to a final gain of 200,000 jobs. April’s preliminary gain of 273,000 jobs was revised down slightly to an increase of 270,000 last month. Compared with December’s weak final gain of only 86,000 new jobs, the four-month average gain of 222,000 private jobs through May is more than double that weather-impacted cycle trough and now outpaces the four-month average gain of 216,000 jobs from August through November 2013.

Initial weekly jobless claims hit 7-year low Initial weekly jobless claims—another important leading-employment indicator—fell to 298,000 for the week ended May 10, a 7-year low. But the following week—the all-important “survey week” for the May jobs report—claims rose to 327,000. This past week, however, the smoother 4-week moving average fell to 310,250, the lowest such reading since June 2007.

ADP soft, but the mix is promising This forward-looking proxy for private payroll growth added a weaker-than-expected 179,000 jobs in May (versus a Bloomberg consensus of 210,000), while April was revised down slightly from a preliminary gain of 220,000 jobs to 215,000. March was revised down from 209,000 jobs to 198,000 versus February’s final gain of 193,000. The trailing 4-month average gain of 196,000 jobs is above January’s weather-impaired final trough of 121,000 jobs, but it remains below the 4-month average of 212,000 jobs through December 2013.

Importantly, ADP also reported that in May, small firms (with less than 50 employees) added 82,000 jobs (46% of the total); mid-sized companies (between 50 and 500 employees) added 61,000 jobs (34%); and larger companies (with more than 500 employees) added 37,000 workers (21%). Because the BLS typically takes a month or longer to identify new employees from small- and mid-sized companies compared with larger companies, that inherent time lag contributes to the leading-indicator nature of the ADP report.

Household employment bounces The volatile household survey gained 145,000 jobs in May, compared with a loss of 73,000 jobs in April and a gain of 476,000 jobs in March. This positive swing is promising, as the household survey also is an important leading indicator for nonfarm and private payrolls.

Manufacturing strengthens May added 10,000 jobs, but April was revised down from 12,000 jobs to only 4,000 jobs added, while March was also revised down from 7,000 jobs to only 4,000. February, in sharp contrast, had added 20,000 jobs. We are expecting better results from this category, with the ISM manufacturing index sitting at a 2014 high of 55.5 in May and auto production at a 7-year high of 16.7 million annualized units.

Construction softens The modest improvement in the housing market did not translate into better construction hiring, adding only 6,000 jobs in May, compared with an upwardly revised 34,000 jobs in April, 13,000 new jobs in March and 24,000 jobs in February. January hit a 6-year cycle high at 51,000 jobs added.

Retail treads water With Easter past us and back-to-school a few months away, retailers added only 13,000 new jobs in May after adding an upwardly revised 43,000 new jobs in April and 29,000 retail jobs in March.

Temps remain steady Temporary help—another important leading indicator of employment growth—grew by 14,000 jobs in May on the heels of downwardly revised gains of 16,000 jobs in April and 22,000 jobs in March.

Education & health surge This category continues to build momentum. Education and health services added 63,000 new jobs in May after adding 39,000 jobs in April, 40,000 jobs in March, 32,000 jobs in February, 16,000 jobs in January and 5,000 jobs in December 2013.

Leisure gains Leisure added 39,000 new jobs in May, up from 24,000 in April and 31,000 new jobs in March.

Local hiring boosts government The difference between private and nonfarm payroll gains in May resulted in the addition of 1,000 federal, state and local government jobs last month, compared with gains of 12,000 in April and only 3,000 workers in March. May’s strength was all due to local government hiring, which added 11,000 jobs last month, while states and the federal government each lost 5,000 jobs.

Unemployment, labor impairment and participation rates steady The rate of unemployment (U3) held steady at 6.3% in May, its lowest level since September 2008. The labor impairment rate (U6)—also known as the “total” rate of unemployment or the underemployment rate, because it more broadly includes discouraged workers and the underemployed—slipped a tick to 12.2% in May. The labor force participation rate remained at a 36-year cycle low of 62.8% in May.

Wages improve, hours worked remain stagnant Average hourly earnings rose by 0.2% in May, a modest improvement over no change in April. Year-over-year wages rose by 2.1% in May, a tick better than in April. The average private work week for all employees was flat for the third consecutive month at 34.5 hours in May. That is discouraging because a change of only 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy.