Economic CrisisForeign Exchange
U.S. May Non-farm Payrolls Outlook: Government Employment Could Be Decisive
The U.S. Bureau of Labor Statistics will release the non-farm payroll report for May on June 7, EST. The significant decrease in the previous non-farm payroll report in April, which was well below expectations and the previous reading, has reignited speculation of a rate cut. Additionally, the three-month average of non-farm payrolls for April was 242,000, compared to 269,000 in March and 261,000 in February.
What does this mean?
Looking at historical levels, the average monthly increase in employment in 2023 was 251,000, while in the first quarter of 2024, it was 276,000 per month. Therefore, despite the unexpected sharp decline in non-farm payroll in April, the overall U.S. labor market remains relatively tight. In other words, there has been a slowdown, but it is limited.
The above is the April non-farm payroll data, which gives an overview of the U.S. labor market. In simple terms, while the April non-farm payroll provided some hope for the Federal Reserve, it did not establish a slowing trend for them as a single set of data cannot pinpoint the issue.
Looking at the breakdown of the April non-farm payroll data, employment growth was mainly concentrated in healthcare and social assistance, transportation and warehousing, and retail. However, employment in the automotive manufacturing and temporary services sectors declined. The leisure and hospitality as well as construction saw growth, although at a slower pace.
Knowing the above-mentioned influencing factors, we could get an overview of the non-farm payrolls this time.
JOLTs Job Openings and ADP
JOLTs Job Openings
According to the April JOLTs Job Openings and the May ADP Employment Report released this week:
In April, job openings in healthcare and social assistance (-204,000) and state and local government education (-59,000) decreased.
Briefly speaking, a decrease in job openings in a particular industry does not contradict an increase in non-farm payrolls. The decrease in job openings could be due to previously advertised positions being filled or some companies withdrawing the recruitment for those openings, while the increase in employment reflects the successful filling of positions. The two can occur simultaneously and actually complement each other, providing a more complete picture of labor market dynamics.
In the healthcare and social assistance sector, there has been a significant decrease in job openings. Although it is unclear how many of these openings have translated into additional employment (a decrease in job openings does not directly equate to an increase in employment numbers), the large base number suggests that the contribution to new employment numbers will not be insignificant.
As for the government sector, typically, due to its significantly lower weight compared to the private sector, its impact on non-farm payroll employment is relatively limited. However, it is worth noting that last July, government employment experienced a significant decline, mainly due to a decrease in education positions at the state and local level coinciding with the summer break. In the July JOLTs Job Openings Report at that time, there was a reduction of 62,000 positions in state and local government education roles.
Judging from the current timing and the sharp decrease in job openings in April JOLTs in both state and local government education (-59,000), is it similar to the above scenario? Therefore, it is reasonable to believe that most of these reduced job openings have not been filled, but rather reduced recruitment (such as closing job postings). Further evidence is that government departures increased by 38,000 in April, with state and local government education-related departures accounting for 32,000, a high percentage of 84%.
In the upcoming data, whether it is non-farm payrolls or JOLTs Job Openings, government data may not be too promising due to seasonal reasons.
ADP
In the ADP employment report for May, the goods-producing sector added only 3,000 jobs despite the boom in the construction industry (32,000 jobs), significantly down from 47,000 the previous month. This decline was primarily driven by the drag from manufacturing, natural resources, and mining. The service-producing sector added 149,000 jobs, with trade, transportation, and utilities increasing by 55,000 jobs, and education and health services adding 46,000 jobs.
The boom in the construction industry can be attributed to the housing market. Early in the year, due to the lack of existing home inventory for single-family homes, developers expanded single-family home starts. However, high mortgage rates have led to sluggish new home sales. As of the end of April, the inventory of new homes for sale remained high at 480,000 units, the highest level since 2008. At the current sales pace, this translates to a supply of 9.1 months, whereas a balanced market typically has a supply of 5 to 6 months, indicating ample new home inventory. In contrast, the supply of existing homes is only 3.5 months, with an average market duration of 26 days, significantly lower than March’s 33 days.
From this, it can be inferred that in April, the housing market focus shifted from new homes to existing homes, which means the construction industry may lose its primary driving force. The abundant inventory and reduced sales of new homes will likely lead to a decrease in new home starts, subsequently reducing the need for related workers. It should be noted that due to the lag between home sales and home construction, changes in employment numbers in the construction industry may not be immediately apparent. In other words, construction employment is likely to gradually decrease in the future.
Clues about the trade, transportation, and utilities sectors can be found in the recently released ISM Services PMI. In May, these sectors significantly exceeded market expectations due to a notable increase in business activity, faster growth in new orders, and slower supplier deliveries. The three driving factors suggest increased demand for transportation and warehousing. Additionally, the business activity index for trade, transportation, and utilities also recorded a rise, indicating that business activities in these sectors are expanding. Taken together, trade, transportation, and utilities are likely to perform well in the upcoming non-farm payroll report.
As for education and health services, this is a large category that includes healthcare and social assistance. The analysis for this category has already been provided earlier.
Besides the aforementioned sectors, several other industries have consistently played a crucial role in driving changes in non-farm payroll employment figures over the years.
Leisure and Hospitality: Recently, there has been an uptick in travel activities in the U.S., likely due to the upcoming travel season, which undoubtedly boosts the leisure and hospitality sector. Last year’s vacation season saw a slump in the leisure and hospitality sector, possibly due to high inflation and high oil prices at the time. However, current inflation and oil prices are considerably lower than last year, which may encourage more vacation activities. Furthermore, the impact of the vacation season on the leisure and hospitality sector is seasonal and prolonged, suggesting a potential increase in employment in this sector in the upcoming NFP report.
Retail Trade: Multiple recent indicators have shown that consumers are becoming more sensitive to prices, increasingly resisting further price hikes by businesses. It is becoming harder for companies to pass on costs, indicating that consumers are now more cautious with their spending. Many retailers have started offering discounts to attract customers. Nonetheless, this adjustment takes time and is unlikely to be reflected in this month’s NFP data. Therefore, the retail trade sector might perform poorly in the upcoming report.
Overall Outlook: The healthcare social assistance sector and the government sector are expected to be the biggest variables in this month’s NFP report. While employment in the construction industry might weaken, this will be a gradual process. The transportation and warehousing sector might perform well, the leisure and hospitality sector could show improvement compared to the April NFP report, while the retail trade sector might underperform. Overall, the significant drop in April’s non-farm payrolls was mainly due to the poor performance of the leisure and hospitality sector. In May, this sector is likely to perform better, though it might be offset by the performance of the government sector. If the government sector performs well, the NFP report might exceed expectations; if it underperforms, it could drag down the overall results.
