The Independent Market Observer

Monday Update: May Jobs Report Blows Away Expectations

Posted by Sam Millette

This entry was posted on Jun 8, 2020 12:46:30 PM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette highlights reports on business confidence and employment, which showed a stabilizing economy in May.Last week’s economic updates showed a stabilizing economy in May, with solid results for business confidence and employment during the month as highlights. This week, important reports will focus on inflation, the rate decision from the Fed’s June meeting, and consumer confidence.

Last week’s news

We started the week with Monday’s release of the ISM Manufacturing index for May. This measure of manufacturer confidence increased modestly from 41.5 in April to 43.1 in May, against expectations for a larger increase to 43.8. While this gain was a positive development, this is a diffusion index, where values below 50 indicate contraction, so the index remains at a concerning level. The manufacturing industry was hard hit in April by factory shutdowns and a steep drop in global demand due to the pandemic, but efforts to reopen factories in May bolstered confidence modestly. While the factory openings should be a tailwind for manufacturer confidence in the short term, the drop in global demand will likely linger and serve as a headwind for a swift increase in this indicator.

Wednesday saw the release of the ISM Nonmanufacturing index for May. This measure of service sector confidence also increased modestly, rising from 41.8 in April to 45.4 in May, against expectations for a smaller increase to 44.4. This better-than-expected result was welcome, but this is another diffusion index, where values below 50 indicate contraction. The results show that service sector confidence remained well below the level needed to support a swift economic recovery. So, while the stabilization of business confidence in May was a positive development, we have a long way to go before it approaches normal levels. More gains in confidence are needed before we see the increased business spending that will help stimulate overall economic growth.

On Thursday, the initial jobless claims report for the week ending May 30 was released. There were more than 1.877 million initial unemployment claims filed during the week, down from the more than 2.1 million claims filed the week before, but above the estimate for 1.833 million claims. Continuing jobless claims increased from a downwardly revised 20.838 million to 21.487 million during the week ending May 23. This report marked the ninth straight week of declining initial claims, which indicates that the peak of job losses is likely well behind us. Nonetheless, despite the continued downward trend in initial claims, more than 42 million claims have been filed during the pandemic. There is still a long way to go before employment numbers return to levels seen before the crisis.

Thursday also saw the release of the April international trade report. The trade deficit widened from a downwardly revised $42.3 billion in March to $49.4 billion in April, which was in line with economist estimates. Exports and imports both fell sharply during the month, dropping by 20.5 percent and 13.7 percent, respectively. The result for exports represented the largest single-month drop since records began in 1992. The shutdown of auto manufacturing plants during the month was one of the drivers of this slowdown in exports, with a large decrease in travel-related trade also playing a part. Overall, the April report showed trading volume falling to its lowest level since May 2010. The pandemic dramatically lowered global demand, which will likely serve as a headwind for trade growth going forward.  

We finished the week with Friday’s release of May’s employment report, which dramatically beat economist estimates. During the month, 2.5 million jobs were added, against expectations for a loss of 7.5 million jobs. The unemployment rate fell to 13.3 percent, down from 14.7 percent in April and significantly lower than economist estimates for a rise to 19 percent. These much-better-than-expected results reinforce the belief that the worst of the damage to the job market caused by the pandemic is behind us. The underlying data was positive as well, as the labor force participation rate and average hours worked both increased. Although these results were certainly encouraging, they should be viewed in context. We lost more than 20 million jobs in April, and the current unemployment rate of 13.3 percent is the second-highest monthly level since World War II. The road back to a full economic recovery will almost certainly be long, but this report shows that we’re moving in the right direction. We may get back to normal faster than expected.

What to look forward to

Wednesday will see the release of May’s Consumer Price Index report. Consumer prices are expected to remain flat during the month, after falling by 0.8 percent in April. This would bring the pace of year-over-year consumer inflation to a modest 0.2 percent, down from the 0.3 percent rate in April. Core inflation, which strips out the impact of volatile food and energy prices, is also expected to remain flat for the month. As a result, year-over-year core inflation should come in at 1.3 percent, down from 1.4 percent the month before. The April inflation reports showed the massive deflationary pressure caused by the coronavirus pandemic. Looking forward, this headwind is expected to remain until economic activity picks up notably.

Wednesday will also see the release of the FOMC’s rate decision for the Fed’s June meeting. Economists do not expect any changes to the federal funds rate, which was lowered to effectively zero in March to stimulate the economy. Members of the Fed have made it clear that rates will remain low until we see a sustained economic recovery. Economists will be focusing on the language in the press release, as well as Fed Chairman Jerome Powell’s press conference, for hints of future Fed actions. While no major surprises are expected from this release and the associated press conference, they will offer a timely update on the Fed’s current view of the economy and markets.

On Thursday, May’s Producer Price Index is set to be released. Producer prices are expected to increase by a modest 0.1 percent during the month, following a 1.3 percent decline in April. On a year-over-year basis, deflation for producers would decline by 1.2 percent. Core consumer prices, which strip out gas and food costs, are expected to fall by 0.1 percent, bringing year-over-year core consumer inflation to a four-year low of 0.5 percent. As was the case with consumer inflation, economists are not currently anticipating a swift increase in producer inflation, given the headwinds created by the pandemic.

Thursday will also see the weekly initial jobless claims report for the week ending June 6. Economists are forecasting that 1.55 million initial claims were filed during the week. If estimates hold, the report would mark the 10th straight week with declining initial claims. While this positive trend is encouraging, claims remain well above historical averages. So, although the worst may be behind us, the job market is still facing significant stress. We will continue to monitor this important weekly release, as well as the continuing claims report, until we see weekly claims return to normal levels.

We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for June. This measure of consumer confidence is expected to increase from 72.3 in May to 75 in June. Strong equity market returns over the past two months and the improving employment situation are expected to be the drivers of this improvement. Still, although an increase would be positive, it would leave the index well below the recent high-water mark of 101 set in February, highlighting the devastating impact of anti-coronavirus measures. Increasing confidence levels have typically supported faster spending growth, so a continued rebound in consumer confidence would be positive, given the importance of consumer spending to the overall economy.

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

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