Private Payrolls on the Rebound, Economists Say

MarketWatch

But layoffs at Census Bureau expected to lead to big job loss in June

Don't be fooled this Friday when the government reports a big decline in U.S. nonfarm payrolls for June. It isn't really as grim as it'll look.

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Just as in May, the swings in the payroll count in June were mostly due to temporary jobs at the Census Bureau. The underlying pace of private-sector payrolls is expected to strengthen in June, according to a survey of top economists conducted by MarketWatch.

In May, the Census hired 410,000 temporary workers, helping to boost payrolls by 431,000, the largest gain in 10 years. In June, the government laid off nearly a quarter million of those temps.

After subtracting all the layoffs in the government sphere and adding a modest gain in private-sector payrolls, total U.S. nonfarm payrolls are expected to fall by about 115,000 in June, according to the median forecast of our survey. It would be the first loss since December.

The focus should remain on private-sector payrolls, however.

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"Below the surface of headline number, expectations are that private payrolls will show modest improvement," wrote John Silvia, chief economist for Wells Fargo Securities.

MarketWatch's survey predicts private payrolls will rise about 125,000 in June, better than the anemic 41,000 counted in May and slightly higher than the monthly average of 100,000 so far this year. Apart from the Census workers, government employment should drop by another 20,000 or so, mostly from layoffs at budget-strapped state and local governments.

Despite the blowout headline number, the May payrolls report was a major disappointment to markets, largely because private-sector payrolls grew so weakly. The jobs report was followed by a weak retail sales report and truly horrible housing data, which fed the growing market pessimism that the recovery could falter.

Most economists aren't ready to throw in the towel. The poor data have "exaggerated the downside," wrote Robert DiClemente, economist for Citigroup Global Markets. He argues that the weakness in housing was expected following the expiration of the government's subsidy to buyers. Housing is downsizing appropriately.

DiClemente and others point to positive factors, such as strong capital spending and the growth in working hours. The "recent data that business capital spending is consistent with a trend toward a gradually improving job market," he wrote. "Massive profit gains have buoyed business confidence and with productivity and hours stretched, firms' need for increased labor is rising."

Despite the negative drag from housing, the economy is in a self-reinforcing cycle, with fatter paychecks leading to more spending and thus to more demand for labor, argues Kurt Karl, chief U.S. economist for Swiss Re.

The average workweek in the private sector has risen by nearly a half hour since December. "This rise is the equivalent of about 1.5 million new jobs in terms of hours worked, and signals increases in income and output," wrote Peter D'Antonio, an economist for Citigroup.

Instead of hiring new workers to meet greater demand, companies are giving their current employees more hours. The number of people who say they are working part-time because of the slack economy has fallen by 10% since the pickup began in earnest in November.

James O'Sullivan, chief economist for MF Global Markets, figures the growth in hours worked is consistent with his forecast for a 4% annualized increase in gross domestic product for the second quarter. Total wage income is rising at a 5.5% annualized pace this quarter, he says, the best growth in three years.

The other data

The rest of the week's data could have a softer hue, economists say.

The purchasing managers' survey from the Institute for Supply Management is expected to fall to about 59% from 59.7% in May and 60.4% in April.

"Moderation in the ISM index is normal and to be expected," wrote economists for Credit Suisse. Over the past quarter century, "the ISM has not remained in the 60s for very long." The long-run average for the ISM is 51.6%, and any reading over 50% indicates the sector is expanding.

At this level, the ISM signals "strong growth in manufacturing," said D'Antonio of Citigroup.

The consumer confidence index is expected to slip just a bit, from 63.3 in May to 62.8 in June, our survey says. The index has bounced decisively off the record-low 25.3 set in February 2009, but remains at a very low level. Aside from the current episode, it's been this low for only one month in the past 17 years.

Motor vehicle sales are expected to fall to a seasonally adjusted annual rate of 11.3 million in June from 11.6 million in May. Sales to corporate fleets fell in June after strong gains in previous months, said economists for Barclays Capital.

Rex Nutting is Washington bureau chief of MarketWatch.

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