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Monday Update: June Jobs Report Hints at Faster Recovery

Posted by Sam Millette

This entry was posted on Jul 6, 2020 11:38:18 AM

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In his Monday Update, Commonwealth’s Sam Millette discusses June employment, international trade, service sector confidence, and producer inflation.Last week was packed with economic updates, with results largely beating expectations. For the second month in a row, the headline job report came in far above economist estimates, supporting hopes for a faster-than-anticipated economic recovery. This week, the economic update front will be relatively quiet, with highlights on service sector confidence, the weekly initial claims report, and producer inflation.

Last week’s news

We started the week with Tuesday’s release of the Conference Board Consumer Confidence Index for June. Confidence increased by more than expected during the month, rising from a downwardly revised 85.9 in May to 98.1 in June, against an anticipated increase to 91.5. This result, which marked the best single-month increase for the index since 2011, helped calm concerns about rising COVID-19 case counts negatively affecting consumer confidence. The much-better-than-expected May jobs report and continued equity market rally in June helped support the increase in confidence in June. Both major measures of consumer sentiment increased in May and June, indicating that the April’s terrible results are likely the low-water mark for these surveys. Increased confidence levels support faster consumer spending growth, so this release was a very encouraging sign for June’s consumer spending reports and overall economic growth in the second quarter.

On Wednesday, the ISM Manufacturing index for June was released. This measure of manufacturing sector confidence increased by more than expected, rising from 43.1 in May to 52.6 in June, against forecasts for a more modest increase to 49.8. The largest single-month increase for the index in nearly 40 years, this result brought manufacturer confidence to a 14-month high. This is a diffusion index, where values above 50 indicate expansion, so this jump bodes well for manufacturing output during the month. Many factories began to reopen in late May and early June, boosting confidence after forced closures in April brought the index to its lowest level since the great financial crisis. Ultimately, this result points toward a faster-than-expected recovery for the manufacturing sector, which was hit hard by anti-coronavirus measures.

Also on Wednesday, minutes from the FOMC June meeting were released. As expected, the minutes contained no major surprises, as FOMC members voted unanimously at the meeting to keep the federal funds rate unchanged at virtually zero. The minutes did show that the outlook of the Fed’s staff economists was more pessimistic at the June meeting compared with the April meeting due to the massive economic disruption caused by the coronavirus earlier in the quarter. Importantly, Fed economists continue to believe that the pace of economic recovery will likely depend in large part on how we manage the continued spread of the coronavirus. The minutes also showed that the level of uncertainty surrounding the Fed’s forecasts is very high due to the unpredictable and unprecedented nature of the pandemic. Ultimately, the Fed members remained committed to providing supportive monetary policy at this meeting, and the minutes help to explain the Fed’s cautious outlook on the economic recovery.

On Thursday, May’s International trade report was released. The trade deficit widened by more than expected during the month, falling from $49.8 billion in April to $54.6 billion in May, against expectations for a decline to $53.2 billion. As expected, a 4.4 percent drop in exports was more than enough to offset a 0.9 percent decline in imports. On aggregate, this report represents the lowest level of international trade for the U.S. since April 2010, highlighting the headwinds to global trade created by the pandemic. Given the disruptions to supply chains and diminished global demand due to the pandemic, it will likely take quite some time for international trade levels to return to pre-pandemic levels.

Thursday also saw the release of the weekly initial jobless claims report for the week ending June 27. Initial unemployment claims fell from an upwardly revised 1.482 million the week before to 1.427 million for the week ending June 27. This number is higher than the 1.35 millions initial claims expected by economists. The June 27 reports marks the 13th straight week with declining initial claims; however, the claims level remains stubbornly high compared with historical norms. Additionally, the continuing unemployment claims report showed a disappointing increase during the week ending June 20, rising from a downwardly revised 19.231 million to 19.29 million. Continuing claims are reported with a one-week lag. These reports showed that while the worst of the pandemic layoffs is likely far behind us, the job market has a long way to go to reach full recovery.   

The June employment report released on Thursday helped show just how much progress we’ve made in getting jobs back since reopening efforts began in May. During the month, 4.8 million jobs were added, far more than the roughly 3.2 million additional jobs expected by economists. Marking the second month in a row in which headline job creation soundly beat economist estimates, this report indicates that the pace of economic recovery once reopening efforts took hold was faster than expected. The underlying data was also positive, with the unemployment rate falling from 13.3 percent in May to 11.1 percent in June, against forecasts for a more modest drop to 12.5 percent. In addition, labor force participation rate increased and the underemployment rate fell. Overall, this very strong employment report showed that reopening efforts spurred more hiring than anticipated, which supports hopes for a faster-than-expected economic recovery.

What to look forward to

On Monday, the ISM Nonmanufacturing index for June was released. This measure of service sector confidence far surpassed economist estimates, increasing from 45.5 in May to 57.1 in June, against calls for a more modest rise to 50.2. This is another diffusion index, where values above 50 indicate expansion, so this swift rebound after the index hit a 10-year-low of 41.8 in April is very encouraging. The service sector accounts for the lion’s share of economic activity, so the rapid recovery in confidence in June is a good sign for the ongoing economic recovery. As we saw with manufacturer confidence, reopening efforts in May and June served as a tailwind for service sector confidence during the month. Ultimately, this report indicates that the pace of economic recovery was faster than initially expected once reopening efforts took hold.

On Thursday, we’ll get the weekly initial jobless claims report for the week ending July 4. As we saw last week, the level of initial jobless claims has improved for each of the past 13 weeks after hitting an all-time high of more than 6.8 million in the final week of March. Still, despite the continued improvement over three months, the level of weekly initial claims on an absolute basis remains elevated compared with historical norms. Throughout 2019, on average, roughly 220,000 initial claims were made a week, so we can see that June’s range of 1.4 to 1.6 million weekly claims is well above normal levels. These numbers indicate continuing pressure on the jobs market despite the improvements we’ve seen since the end of March. We’ll continue to monitor this weekly report until the level of initial claim returns closer to normal.

On Friday, the Producer Price Index for June will be released. Economists expect to see producer prices increase by 0.4 percent for the month, following a similar 0.4 percent increase in May. Nonetheless, headline producer prices are likely to show a modest decline on a year-over-year basis. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to increase by 0.1 percent in June, after falling by 0.1 percent in May. Inflationary pressures have been kept at bay over the past few months due to the massive shock to demand created by the pandemic; however, with businesses reopening and producers and consumers starting to spend again, increased inflationary pressure is expected.

That’s it for this week—thanks for reading and stay safe!

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