The Day Ahead: Investors Anxious to Know if Job Losses Moderated in August

Analysts expect to see the smallest drop in the monthly employment numbers since last August this morning, leading equity futures to trade higher. With less than two hours to go before the market opens, Dow futures are up 36 points to 9,366, while S&P 500 futures are trading 3.7 points higher at 1,005.40.

The decline in July’s nonfarm payrolls was the smallest in 11 months, so the Employment Situation report for August should bring optimism to markets so long as the trend continues towards improvement. Judging by the data released so far, that looks far from being a certainty. The median forecast is that 230k jobs vanished in the month, a somewhat minor gain from the -247k print in July, and not all analysts are so optimistic; estimates range from -115k to -365k. 

The -230k consensus has been revised from a -200k print earlier in the week, but two employment indicators were worse than expected this week, causing forecasters to dampen their hopes. The ADP employment report found that 298,000 private jobs were lost in August, in contrast to expectations for a fall of 245,000 jobs, but an improvement from the -360k print in July. Meanwhile, jobless claims averaged 571,250 each week in August, compared to 560,000 in July, suggesting that lay-offs were greater in August than July.

“With jobless claims trending at about 570k per week, progress is unlikely to be very rapid, and a return to employment growth still seems a story for next spring at the soonest,” said Ian Shepherdson from High Frequency Economics, who forecasts that 250k jobs vanished last month.

Other labor data has also been mixed. The ISM manufacturing and non-manufacturing indexes each reported month-to-month improvements, but neither was close to suggesting stabilization.

As for the unemployment rate, it is set to rise two-tenths to 9.6%. In last month’s report it ticked down one-tenth, surprising many, but devilish details revealed that the number was only a technical gain: the labor force had fallen 442,000 as some workers gave up on looking for work altogether.

Looking at two economic recoveries in the early 1980s, BTMU’s Ellen Zentner said the jobless rate tends to peak just as the economy enters recovery, suggesting that the 9.5% rate in June will be the apex. However, she said there are plenty of reasons why the rate could inch towards double-digits as well. 

“Believe it or not oftentimes it is a return of confidence in the labor market that causes the unemployment rate to rise even the payroll job loss is slowing,” she wrote in a weekly note. “As the labor market mends those discouraged workers that previously  dropped out of the workforce will likely re-enter and, at least temporarily, drive the unemployment rate higher. For this reason we feel it is too early to call the peak in the unemployment rate.”