Political Turmoil Won’t Affect May Employment Numbers
Market analysts and Fed watchers will be closely monitoring the May employment numbers when they are released on June 2. As well as the normal signs of economic activity, they will be trying to gauge the effect of the recent political turmoil on the economy. Employment numbers may go up or down, but it’s unlikely that the past fortnight’s developments will contribute to whatever trend emerges. Here’s why.
The Bureau of Labor Statistics’ Monthly Employment Report includes data from the establishment survey and the household survey. As suggested by the names, the former samples nonagricultural business establishments and the latter samples households, and is wider in breadth, including “self-employed workers whose businesses are unincorporated, unpaid family workers, agricultural workers, and private household workers, who are excluded by the establishment survey.”
The establishment survey produces the popular headline nonfarm payroll number, but the household survey also includes its own measure of employment. Both estimates of employment converge over the long-run. The household survey produces estimates of the number of unemployed persons and the unemployment rate.
The survey period for both surveys differ somewhat. For the establishment survey it is the pay period that includes the 12th of the month and for the household survey it is the calendar week that includes the 12th of the month. In this time framework, the stream of tumultuous political news was initiated May 9 when FBI Director James Comey was fired by President Trump.
For May 2017, the household survey week ran from May 7–13. For the establishment survey, pay periods at most establishments presumably cover at least some of this tumultuous period, but the start of the pay period is important as the survey counts as employed anybody who was on payroll for any part of the survey period. Accordingly, if a firm decided to fire employees after the start of the political turmoil, if their pay period includes the 12th and starts before the 9th these fired employees would still be counted as employed by the BLS.
With all of the timing nuances of how the BLS calculates the jobs numbers, it is unlikely that these developments significantly influenced hiring and firing decisions during this period, and if business decisions were influenced, they probably would not be reflected in the May data based on the BLS’s survey methodologies. Moreover, the duration of pay periods tend to be longer, so the chances of the survey pay periods including dates before the 9th is high.
The few pieces of labor market data received thus far for May have been solid. Initial jobless claims covering the week of the 12th fell to its second lowest level since 1973 suggesting that layoffs remain low. Moreover, the employment subindexes within the current conditions sections of the Philadelphia Fed and Empire State manufacturing surveys remained high. However, manufacturers in these regions appeared to lower their future hiring plans in early May, presumably due to the increased uncertainty surrounding the outlook.
If the heighted political turmoil continues, confidence surveys would be adversely affected in coming months. This likely would have some dampening effects on economic activity, more so in business investment and hiring decisions than in consumer spending. This may potentially moderate the recent momentum in the economy.
Moreover, if sustained, severe political turmoil may influence economic policy deliberations and monetary policy. In particular, tax and fiscal reform initiatives may be delayed, and some of President Trump’s support for legislative proposals in Congress may be diluted. These outcomes are highly uncertain at this point.
In addition, any significant reversal in confidence indicators may influence the Federal Reserve’s decision on whether to raise rates in June or the economic forecasts of FOMC members or the projections of the Fed funds rate they deem appropriate. Currently, the futures markets place a greater than 90% probability, of the Fed raising rates in June, down only modestly from its near 100% probability following the strong April jobs report.
We continue to expect the Fed will raise rates; the potential downside risks posed by the Washington turmoil are unfortunate.
Mickey Levy is Chief Economist for the Americas and Asia, Berenberg Capital Markets, LLC and Member, Shadow Open Market Committee.
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