Employment Situation Preview: Expect Disappointment

On Friday, at 8:30 AM ET, the BLS will release the employment report for May. The consensus is for an increase of 167,000 non-farm payroll jobs in May, and for the unemployment rate to be unchanged at 7.5%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 135,000 private sector payroll jobs in May. This was below expectations of 171,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month. But in general, this suggests employment growth below expectations.

• The ISM manufacturing employment index decreased in May to 50.1% from 50.2% in April. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS reported payroll jobs for manufacturing decreased by close to 20,000 in May. The ADP report indicated a 6,000 decrease in manufacturing jobs.

The ISM non-manufacturing (service) employment index decreased in May to 50.1% from 52.0% in April. A historical correlation between the ISM service employment index and the BLS employment report for non-manufacturing, suggests that private sector BLS reported payroll jobs for non-manufacturing increased by about 65,000 in May.

Taken together, these surveys suggest only around 45,000 jobs added in May - significantly below the consensus forecast.

• Initial weekly unemployment claims averaged about 348,000 in May. This was up from 343,000 in March, but still near the low for the year.

For the BLS reference week (includes the 12th of the month), initial claims were at 344,000; down from 355,000 in April.

• The final May Reuters / University of Michigan consumer sentiment index increased to 84.5 from the April reading of 76.4. This was the highest level since July 2007. This is frequently coincident with changes in the labor market, but also strongly related to gasoline prices and other factors.

• The small business index from Intuit showed 35,000 payroll jobs added, the same as for April. This index is improving a little.

• And on the unemployment rate from Gallup: U.S. Payroll to Population and Unemployment Worsen in May

Gallup's unadjusted unemployment rate for the U.S. workforce was 7.9% for the month of May, a half-point increase over April, and statistically unchanged from May 2012 (8.0%).

Gallup's seasonally adjusted U.S. unemployment rate for May was 8.2%, up from 7.8% in April. Gallup calculates its seasonally adjusted employment rate by applying the adjustment factor the U.S. government used for the same month in the previous year.

Note: So far the Gallup numbers haven't been very useful in predicting the BLS unemployment rate.

• Conclusion: The employment related data was mostly disappointing again in May.  The ADP and ISM manufacturing reports suggest a decrease in hiring. However weekly claims for the reference week were slightly lower in May than in April (although claims for the month were higher), and consumer sentiment increased sharply.

There is always some randomness to the employment report, but my guess is the BLS will report below the consensus of 171,000 jobs added in May.  Based on the ISM reports (and more), we might see a very weak report on Friday.