Will US Job Growth Disappoint In May For 3rd Straight Month?

One month of lackluster job growth can be blamed on the weather, but two or even three is dangerously close to a trend.

Unfortunately, we might be in for another month of slower job growth, though the pace of job creation in May probably ticked up from the weak March and April showings, economists said in anticipation of the May nonfarm payrolls report due Friday. However, they added that the unemployment rate likely held at a three-year low of 8.1 percent as the labor participation rate continues to slip.

The U.S. has enjoyed an exceptionally mild winter, which means some hiring was pulled forward into the late winter from the early spring, especially in the construction and retail sectors.

The seasonal adjustments in recent months have made it very difficult for economists to discern the underlying trend in the labor market, making May's report a particularly important data point to watch.

It's possible that the payback period has faded, so many people might be watching this particular report as the first sign of a return to the underlying trend, said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York. This could be a critical report.

Payrolls are estimated to have climbed last month by 150,000, after a disappointing 115,000 gain in April, according to the median forecast of 77 economists surveyed by Reuters. The projections ranged from 75,000 to 206,000.

My sense is that job growth is going to be modest this month, said FTN Financial Chief Economist Christopher Low, whose projection is in line with the consensus.

We may see government layoffs pick up again because California had an unexpected, very large budget shortfall, so I wouldn't be surprised if there are some layoffs related to that, Low added.

Government payrolls declined by 10,000 in May after dropping 15,000 last month and 12,000 in March, according to economists' forecasts for the Labor Department report.

Excluding government jobs, private payrolls climbed 160,000 in May after rising 130,000 in April, the smallest gain since August.

However, ITG Investment Chief Economist Steve Blitz pointed out in a May 25 note that May's increase in payroll growth will be coming more from a deceleration in layo?s than an accelerated pace of hiring.

The pace of job creation is central to President Barack Obama's re-election chances in November, when the economy is likely to be the top issue for voters.

I think it's going to be very difficult for Obama to win this election if the election is decided by economic issues, Low said. And that's the reason the White House is putting so much effort into changing the subject to other things.

Even with the recent decline, the jobless rate remains about 2 percentage points higher than its average over the last 50 years.

His Republican challenger, Mitt Romney, called the April jobs report very disappointing.

We seem to be slowing down, not speeding up. This is not progress. This is very, very disappointing, he told Fox News.

Unemployment Rate

Economists expect Friday's report to show May's unemployment rate holding at a three-year low of 8.1 percent as more working-age people stopped looking for jobs.

Job growth is moderate, and it's not enough to keep up with the growth in the working age population, Low said. The only reason the unemployment rate is falling is because the labor force participation rate is dropping.

In April, the labor force participation rate declined to 63.6 percent from 63.8 percent in the prior month. When the recession officially started in December 2007, the labor participation rate stood at 66 percent and the unemployment rate was at 5 percent.

In every previous recovery, at some point before we get to the lows in unemployment, the participation rate starts to rise, Low said. If that were to happen, then the improvement in the unemployment rate would stop.

If we do get to a 5 percent unemployment rate in the next 10 years, I think the only way to do it is with a significant number of people dropping out of the work force, Low said. It's not the most optimistic picture.

The labor force might have shrunk again in May, Paul Dales, senior U.S. economist at Capital Economics, wrote in a May 24 note.

The Federal Reserve, in its April 25 economic projection, sees the U.S. unemployment rate easing to as low as 7.8 percent in the last three months of this year. That's more optimistic than the central bank's January projection of 8.2 percent, but it is still well above policymakers' estimates for full employment, which range from 5.2 percent to 6 percent.

The Federal Reserve wants desperately to see the pace of hiring improve in order to drive down the rate of unemployment to where it perceives [it to] have gotten traction of its own, Wilkinson said. And job creation is simply not strong enough to get the economy where the Fed wants it to be.

Fed Chairman Ben Bernanke didn't give an absolute number in his February speech on the labor market, but translating his call for 4 percent to 4.5 percent real gross domestic product growth to the labor market, Low estimate Bernanke would like to see job growth of 250,000 to 300,000 a month.

That certainly is the kind of growth that would transform the economy into a much healthier situation within a year or two, Low said. But we haven't seen that kind of job growth in a very long time and I don't expect that we will.

Wilkinson thinks that if the economy continues to pour in marginal or, at best, weakening data, there's a very high chance that the Fed would move to boost the size of its balance sheet as a way to encourage businesses to make investment decisions in order to reduce unemployment.

The Fed has stated loudly and clearly that further quantitative easing is a tool it doesn't yet want to take off the table, Wilkinson said.

How May data stacks up in terms of U.S. job growth is particularly important given that Operation Twist is about to unwind and the Federal Open Market Committee is scheduled to meet on June 20.

May data is what they will have to go on in driving the decision whether to twist again like they did last year, Blitz wrote in a May 25 note.

Construction Jobs

The housing sector has been the Achilles' heel of the economy ever since the housing bubble burst. While recent data has shown a relatively upbeat situation for the market, employers are still reluctant to hire.

New home sales rose in April by 3.3 percent to a seasonally adjusted 343,000-unit annual rate, according to the Commerce Department. Compared with the year-ago period, sales were up 9.9 percent. Meanwhile, existing April home sales hit a two-year high, and the median price for both new and previously owned homes surged last month.

Despite the encouraging news, construction hiring has been volatile this year. The sector showed some improvement in the first quarter, but March and April together were negative.

Economists say the housing sector workforce may stabilize in May, but they don't expect any major hiring because the level of new home sales right now is about the same as it was at the beginning of the year, which was about the same as it was two years ago.

It's sort of bouncing along the bottom and it has been for a very long time, Low said. So there's really no need to scale up the number of people working in the industry.

Back in 2005, at the peak of the housing boom, there were 7.7 million workers in the construction industry, whereas today, there are only 5.5 million.

There's been a permanent loss of around 2.2 million jobs in that time frame. And despite evidence of a pickup in the health of the housing market, it has not, and is unlikely to, result in strong job creation in that sector, Wilkinson said.

Those jobs are not coming back, Wilkinson said.

Watch Out For Revisions

Here's one reason why you shouldn't freak out if May's job report disappoints again: Wait for two months and that figure might just get revised significantly higher.

While the initially reported figure, which is reported the first Friday of every month, gets most of the media attention, it is subsequently revised twice, and it is the final number that paints the more accurate picture of job growth. The second revision is the final reading. For example, the June number will be revised over the next two months until it's finalized in the August report.

This table shows that from June 2011 to March 2012 (see the latest revision available), the headline payrolls figure has been revised significantly higher for ten consecutive months. Economists are confident that while April posted the weakest showing in six months, there's a good chance that this number will be revised upward.

Over the course of this period, the net revisions have shown that 411,000 more net jobs were created than the headline numbers would lead one to believe.

That means that U.S. employers actually added 163,200 workers to their payrolls during the June through March period, instead of the 122,100 jobs shown in the initially reported figures.

More importantly, the direction of the revision is indicative of the trend in the jobs market and the U.S. economy. Net revisions were very negative during the financial crisis in the fourth quarter of 2008 but turned positive as the economy began to heal.