Continuing claims data pulls US July employment forecast lower

For the July employment report, scheduled for release on Friday, August 7, the nonfarm payrolls are expected to rise by 200k, a downward revision from the forecast of 250k. Private payrolls are expected expand by 200k, and government payrolls will remain unchanged. 

"The rise in continuing claims pushed the median output from our forecast models substantially lower, and we felt the need to feed some of that weakness through to our official forecast. Continuing claims returned to the level of the last survey week, and our models took substantial signal from this change," says Barclays.

The unemployment rate is likley to remain unchanged at 5.3%. Underlying the view on the unemployment rate is the expectation that employment in the household survey will rebound off of last month's decline, which is seen as anomalous and inconsistent with other labor market data. If so, this would likely coincide with a modest rebound in participation and forestall a decline in the unemployment rate in this survey period. Elsewhere, average hourly earnings are expected to rise by 0.3% on the month, partially reversing the flat reading observed in June. This would leave average hourly earnings up 2.3% y/y. Finally, average weekly hours are expected to remain unchanged at 34.5.

"We still view our forecast as pointing to only a modest slowing in the rate of employment growth, and the forecast remains near the 225k mark, which we expect to prevail on average through the end of this year. In addition, at 200k, our forecasted pace of payroll growth for July is well above that needed to keep up with labor force growth, and we expect the unemployment rate to resume its downward trend in coming months," added Barclays.

The FOMC takes into consideration a broad array of labor market indicators, and the headline number is only one proxy for broader strength. The labor market is in near normal levels and expect it to continue to improve going forward. Given the improvements in the labor market so far this year, a July employment report consistent with the forecasts will keep the FOMC on track for a rate hike by the end of this year.

"We maintain our call for a September start to the hiking cycle. As with each hurdle on the way to normalization, an employment report substantially weaker than we forecast would raise the bar for a rate hike," continued Barclays.