Some optimism, some pessimism about July employment report

Much speculation surrounds the July employment report, to be released Friday morning, as COVID-19 cases surged in many states, causing some economic uncertainty.

The June report showed 4.8 million jobs added and the unemployment rate fell to 11.1%. Economists polled by IFR Markets expect 1.650 million jobs added in the month and a 10.5% rate of unemployment.

Steve Skancke, chief economic advisor at Keel Point LLC, anticipates a 1 million increase in jobs. Tracking initial jobless claims during the month, the "re-shuttering of service business in high virus resurgence localities and high frequency data showing a slowing of the robust economic rebound from a bottoming in late April,” Skancke said, would suggest a loss between 400,000 and 1 million jobs in the month. “As a result of the data collection period being mid-month (week ending July 12), more economic slowing in later July and an earlier, better-than-expected rebound in manufacturing, the Friday Department of Labor report will be a positive surprise.”

Jon Mackay, head of sales, wealth management solutions at Schroders (SHNWF), feels the current estimate is “too high.”

“We saw re-openings rolled back in July as states faced surging COVID-19 cases and like we saw in the jobless claims numbers last week, which ticked up, I would expect the pace of new jobs added slowed considerably from the previous two months and will likely be lower than the consensus estimate,” he said.

Sahak Manuelian, managing director of equity trading at Wedbush Securities, expects the report to come in around expectations. "I think it is likely to come in around expectations to even slightly better,” said Manuelian. “If the next round of fiscal support is delayed, that will prove to have further deteriorating effects and the jobs report gets more interesting then."

Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, said rather than fixating on the number itself, he will be looking to see if the healing trend in the labor market continues (positive job growth, decline in the unemployment rate, uptick in participation, etc.).

“The payrolls numbers have been even more volatile than usual, and payrolls data will continue to be an important piece of the economic puzzle, but will have less impact than the trajectory of COVID-19 cases, which will dictate the pace of reopening (which affects hiring decisions), and other higher frequency data points, like initial jobless claims,” Samana said. “We think a solid labor market is a critical to the health of the consumer and the overall economy, as that was one of the few economic bright spots prior to the pandemic, and the pace of the rebound will continue to be watched closely.”

Hank Smith, head of investment strategy at The Haverford Trust Company noted, given the recent spike in COVID-19 cases (although they have leveled off in some states) and the resulting restrictions put back in place, the risk is on the downside for Friday’s jobs report.

“The jobs report is going to continue to be very important for many months to come, very akin to the post ‘08/‘09 recession,” Smith said. “More important than the monthly labor report is the weekly jobless claims, as this is a leading indicator, while the monthly jobs report is a lagging indicator.”

Robert R. Johnson, professor of finance at Creighton University’s Heider College of Business, is pessimistic about Friday’s report. “I believe the jobs report is more likely to disappoint than to come in above expectations, as the coronavirus pandemic is worsening around the country and the unemployment rate may actually increase,” he said. “It is becoming more obvious that the hope for V-recovery is unlikely. At best, we appear to be headed for a W-shaped recovery." He expects further deterioration in the August report.

Skancke, who formerly served on the White House National Security Council and economic policy team, said the July jobs report will be important to political leaders in deciding fiscal stimulus.

“The better-than-expected May and June jobs reports, showing 7.5 million new jobs added in just two months, may have sparked overconfidence,” he said. “The July report will be a sobering reminder that the path of the economy will depend significantly on the course of the virus and that one million new jobs is not enough to support recovery momentum.”

Factory orders
Factory orders grew 6.2% in June after gaining 7.7% in May, according to the Commerce Department.

Economists polled by IFR Markets projected an increase of 5.0%.

New orders excluding transportation rose 4.4% after a 2.6% gain a month earlier.

ISM-New York
Business conditions in the New York City area were at their best level in 15 months, with the current conditions index rising to 53.5 in July from 39.5 in June, according to the Institute for Supply Management-New York.

However, the six-month outlook dropped to 49.6 from 67.1.

News, commentary and research reports are from third-party sources unaffiliated with Fidelity. Fidelity does not endorse or adopt their content. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from their use.