We expect a total change in employment of 750,000 and a decline in the unemployment rate to 5.6% in the U.S. June employment report. The major economic narrative to emerge from the summer hiring reports will likely be that consumers are flush with cash and pivoting to demand services, which will bolster overall hiring during the summer months. Thus, the June employment report will likely reflect a surge in hiring to prepare for what will be a monumental release of pent-up demand for services over the next three months.
The primary policy takeaway will again continue to revolve around the timing and magnitude of the Fed’s eventual removal of accommodation from financial markets via their $120 billion in monthly asset purchases ($80 billion in Treasuries and $40 billion in mortgage-backed securities). Since the Fed is already openly signaling that it is discussing this issue internally, we do not expect a sustained move higher in yields should the topline number arrive at or above our forecast. We do not expect a formal announcement on a change in the pace or alteration of the composition of asset purchases until the September meeting at the earliest.
Seasonal adjustments may wreak havoc with the topline and create conditions for a much stronger increase at or above 1 million. This will likely be most apparent in education hiring where there could be close to one-quarter of a million new hires in the sector, the overall service sector as well as federal, state and local government hiring.
The overall average seasonal adjustment by the Bureau of Labor Statistics in the five years prior to the pandemic is 383,000 around the first estimate and 360,000 in the final estimate of the monthly change in employment. Noise associated with education hiring could be a real issue in the BLS estimate given the unusual conditions that prevailed around hiring one year ago. It is important to note that the level of education employment was down significantly in 2020 compared to pre-pandemic hiring, causing a decline in seasonally adjusted employment in fall 2020. We could be setting up for a seasonally adjusted upside surprise in education hiring, thus our notation of the upside risk to our provisional 750,000 forecast.
We expect a strong increase in average hourly earnings of 3.6% on a year ago basis and 0.4% month over month due to rising wage pressures at the bottom of the income ladder. These pressures capture the large number of individuals streaming back into the labor force inside the leisure and hospitality sector, which has expanded by 1.25 million individuals during the first five months of the year. This will also play into the ongoing—albeit tiresome—debate around the impact of unemployment insurance and the return to work by individuals furloughed and fired during the pandemic.
We are also closely monitoring aggregate hours worked and weekly hours of all employees as firms continue to struggle to compete for workers that are far pickier with respect to where they work and wage demands.
In addition, we are watching goods producing, manufacturing and construction jobs quite closely due to pricing pressures inside the construction industry which has slowed work and presumably hiring. We are also watching wage demands across the goods producing and manufacturing sectors that are creating frictions and may result in a slower pace of hiring than one would expect. While manufacturing employment survey data looks quite strong, there may be a lag before that sentiment is translated to more robust hiring in the sector.
Alternatively, the use of non-traditional data provided by employee scheduling software company Homebase has been quite useful and somewhat predictive in forecasting monthly changes in topline employment. A simple multivariate estimate that includes Homebase data does suggest a strong increase in employment close to 1 million on the month. Given our assessment of the challenges with seasonal adjustments due to the long echo of the pandemic and the utilization of alternative data to estimate the total change in employment after such an unusual year, there is a clear risk of a major upside surprise in the June hiring data.
