US June NFP Payrolls: Another Miss Ahead?

July 1, 2021

It’s becoming a theme this year that the NFP does not match up with forecasts.

The thing is, eventually analysts are going to have to get it right, right? But even now, with many economists anticipating a higher rate of job creation compared with last month, they are very cautious with their projections.

Is this the month that we might finally have a beat of expectations?

One of the things to keep in mind when gauging the market reaction to the data is that we are going into a long weekend for US traders.

Generally, there is a bit of optimism in the lead-up to the fourth of July, while major investors like to protect their holdings while they are away. Therefore, economists already foresee a little dollar strength from that factor.

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What else can we expect?

What we are looking for

The consensus is that the US added 700K jobs during June, compared to 559K last month.

Of course, while this is a generous number for normal times, it’s still somewhat disappointing for a recovery. Indeed, analysts estimate that the US is 7 million jobs short of returning to pre-pandemic levels.

If we consider a “normal” NFP result is around 200K, and the average so far this year has been 530K a month, then it would take another 21 months (or to the second quarter of 2023) for the labor market to recover.

However, when we factor in monetary policy, then slow economic recovery might be seen as positive for the stock market and negative for the dollar.

Economists expect that the Fed will keep rates lower for an extended period of time. Indeed, the Fed will do this to try to prop up the jobs market. And with slow job creation, the expectation is that inflation would be muted with less demand.

The other key factor to watch

With that in mind, we probably want to pay close attention to the average hourly wages data. We can project an increase of the data at 3.6%, compared to 2.0% in the prior reading.

The Biden Administration is pushing for employers to pay more. This is in response to complaints that people are refusing to return to work, because of overly generous unemployment benefits. If wages are rising, there is more disposable income, and therefore more demand.

The flip side is that the theme at the start of the pandemic was that average hourly earnings increased because it was primarily people with lower-paying jobs who were made redundant.

If the economy is returning to its pre-pandemic situation, then we ought to see downward pressure on the average wage.

What we’ve seen so far

The ADP employment data on Wednesday showed a significant increase in service jobs. However, the previous month was also significantly adjusted downward.

This can be attributed to the uncertainty in data collection due to covid. Admittedly, it’s been common to have significant revisions to prior data. This, in turn, can drive the market even if the headline data comes in as expected.

Moreover, experts predict that the unemployment rate will tick down further to 5.7%, compared to 5.8%. However, that could depend largely on the labor force participation rate, which also dropped last month.

Overall, with more states bringing their unemployment programs to an end (in an effort to get people back to work) we might see an increase in participation.

By Orbex