US Non-Farm Payrolls May Preview: Context is everything

Labor statistics from April and May have set an impossibly high standard for market reaction. 

Non-farm payrolls shed 20.5 million positions in April, over the last 11 weeks 43 million Americans have filed for unemployment insurance. From a market perspective the expected 8 million loss to May payrolls is old data.

The unemployment rate is forecast to jump to 19.8% in May, which would be the highest since the 1938 recession but just barely since the peak that June was 20%.  The record in modern US economic history is 25.6% in May 1933. April’s 10.3% increase in unemployment to 14.7% was the greatest single month gain in history.   

Unemployment in a market context

In the context of the last two months the accumulation of labor market information has detailed the debacle that has swiftly overcome the US economy but not really deepened our understanding of what has happened or how it may end. 

It is the purpose of markets to judge information and price accordingly. To do that markets use historical guidelines. Whether those parameters are applicable in this moment is unknown but they are what defines market reactions. 

In most previous steep recessions the rebound has been sharp and swift, the 1981-82 case is the best example.  The 2009 recession different. Its causes were more diffuse and the business cycle aspects were compounded by the financial crisis and the threat to the banking and credit system.  The recovery was considerably slower and weaker than prior downturns.

Markets are placing their bets on the earlier model with the March, April and May fantastically sharp decline to be matched by an equally steep rebound int he third quarter.  Is this the correct comparison?  We do not know but it is the idea that is shaping market judgement on US economic statistics.

Labor market indicators

The ADP private payrolls that cover about one-sixth of the US labor force are the best indicator for the overall labor market. In May ADP payrolls dropped 2.76 million after falling 19.557 million in April, but they had been forecast to plunge 9 million. 

ADP payrolls

Initial jobless claims were 1.877 million in the latest week and have been on a steady decline for two months after peaking at 6.867 million in late March.  Continuing claims have also declined from their top three weeks ago at 24.912 million though they rose 649,000 last week to 21.487 million.

Continuing claims, weekly change

Purchasing managers’ indexes and consumer sentiment

The surveys conducted by the Institute for Supply Management (ISM) have improved marginally in May, indicating that the bottom for business sentiment was likely in April.

The manufacturing index rose to 43.1 slightly ahead of the 43 forecast.  April’s 41.5 result had been the lowest since April 2009.

The new orders index climbed to 31.8, well below its 40.3 estimate. The April 27.1 score was the weakest since December 2008.  Order backlogs rose to 38.2 in May from 37.8 the prior month.

The employment index reached 32 in May also missing its 35 prediction.  April’s 27.5 reading was the lowest since February 1949. 

This was the first increase in the ISM factory index since January and seconds the regional Fed surveys from Dallas and Philadelphia that have manufacturing rising from the April bottom.

Services PMI rose to 45.4 in May from 41.8. New orders climbed to 41.9 from 32.9 and employment edged higher to 31.8 from 30.

Consumer confidence indexes from the Conference Board and the University of Michigan turned slightly higher in May.

The Conference Board reported its long-running confidence index moved to 86.6 in May from April’s 85.7 score.  The index which has been tracking US consumer attitudes since 1967 had fallen from 132.6 in February, the sharpest decline the series history.  

Michigan’s survey saw its sentiment index rise to 72.3 this month from 71.8 after suffering a similar two month plummet in February and March.

Michigan consumer sentiment

Conclusion

Unless the May NFP numbers are much worse than expected markets will not be moved by one more addition to the long tale of dismal statistics. 

If the payrolls are better than predicted reflecting the same improvement as the ADP figures it will confirm the existing market opinion that the economy has put the worst behind it, ratifying the current trends in equities, bonds and currencies.

Over the past three weeks the US has lost all its pandemic risk-premium and is back to pre-crisis levels against in all of the major pairs.   Markets are not quite ready to resume a comparison of economic activity that will probably take until the second quarter is over, but, if the pandemic continues to recede it is next on the agenda.