Next Up: May US Non-Farm Payrolls

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We are expecting another massive drop in payrolls this time around. However, we don’t expect it to be as dramatic as last month.

Just how bad the numbers will be might have more to do with timing than the underlying situation in the economy.

Tracking the number of jobless claims during the month, it was around mid-May that the number of people receiving unemployment benefits turned around. This, of course, coincides with the move towards reopening the economy, an uneven process across the states.

The question is how much lag time is there between the economy reopening and people reporting that they have returned to their jobs.

The Incentive Issue

Rather controversially, perhaps, depending on prior job and location, many people saw their incomes increase. This was a consequence of the additional funds coming in through government assistance programs.

This might make many employees reluctant to return to their jobs, and employers reluctant to bring them back unless they are strictly necessary.

To counteract this effect, many workers were able to apply for unemployment benefits. Therefore, they counted as unemployed for purposes of the BLS survey behind the NFP.

Meanwhile, they still had a job that they couldn’t go to due to lockdowns. This means that as the economy reopens, a large chunk of the unemployed people don’t have to go out to seek jobs, and we would expect them to quickly return to work.

What We Are Looking For

All in all, this makes forecasting what the result will be like quite difficult, so predictions are a bit scattered. The market will have trouble pricing in this lack of agreement. Therefore, we could get quite a bit more volatility in currency pairs this time around.

The closest thing we have to a consensus is for May NFP to come in at -8.0M. This would more than halve the number of losses in the prior month of -20.5M.

However, that might be an overly pessimistic outlook, since on Wednesday, we had a different result from the private ADP measurement. ADP used to be predictive of the NFP figure, but it’s rather fallen out of favor.

Nevertheless, it showed -2.8M jobs lost compared to a -9.0M projection, a sign that the jobs market might not be as bad as many economists are expecting.

The Underlying Figures

The other number that can rile up markets is the unemployment rate. Expectations are for it to push to the worst rate since the Great Depression, at 19.7% compared to 14.7% in April.

But, as mentioned previously, if people are expecting to return to work now that the economy is reopening, this could lower the unemployment rate dramatically.a

Finally, we can expect Average Hourly Earnings to increase +1% in the month compared to +4.7% prior.

Last month we saw a statistical jump in average hourly earnings, since employment losses were concentrated among lower-paying jobs. If the economy is restarting, then there are likely to be more lower-paying jobs returning, which could depress this figure.

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