Joseph LaVorgna, Deutsche Bank’s Chief US Economist, thinks the May employment numbers will be huge.
In a note to clients on Thursday, LaVorgna estimates that the economy added 275,000 nonfarm payroll jobs — well above the Wall Street consensus of 225,000.
LaVorgna also thinks the unemployment rate will fall to 5.3%, while consensus is for it to remain steady at 5.4%. The BLS is set to release May employment report on Friday morning at 8:30 a.m. ET.
The labour market inputs we use to project employment have strengthened meaningfully over the past month. Initial jobless claims were only 275k during the May employment survey week — the four-week moving average was even lower at 267k. This compared to a 296k reading during the April employment survey week. At present, jobless claims are hovering near a 15-year low. At the same time, the growth rate of employee tax withholding receipts has meaningfully increased from the April to May employment survey periods — tax receipts rose around 5.6% in May compared to less than 4% in April. Moreover, unit motor vehicles sales advanced to their fastest rate last month (17.8M units) since July 2005 (20.7M). Individuals do not pay tax on phantom income and they do not purchase a car or truck if they are pessimistic about the economic outlook.
If LaVorgna’s forecast is correct, the nation’s unemployment rate will hit its lowest level since April 2008, when jobs were declining rapidly at the start of the recession.
LaVorgna also points out that the last time the economy was in a period of expansion and had an unemployment rate of 5.3% was January 2005 — when the federal funds rate was 2.25%.
This leads us, once again, to the question everyone is asking: When will Chair Yellen be ready to raise rates?
“Currently, a very dovish FOMC wants to see more evidence that price/wage pressures are building before it feels comfortable lifting rates off of zero,” LaVorgna wrote.
“If the May employment report is as strong as we project, it is likely to influence the tone of the June 17 FOMC statement, which will also be accompanied by updated economic and financial forecasts, as well as a post-meeting press conference with Chair Yellen.”
LaVorgna added that Vice Chair William Dudley’s speech on the economy and monetary policy planned for Friday could “be an important gauge of how a ‘data-dependent’ Fed views the latest developments.”
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