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One of the most bullish analyst shops out there — Deutsche Bank — just sliced its May jobs data estimate due to all the bad data.The tone of the economic data has softened over the past couple of weeks. There have been some high profile data surprises, such as the sharp decline in April durable goods orders and the respective 10 and 15 point declines in the NY Empire and Philly Fed manufacturing surveys. However, other series such as claims, starts & permits, existing home sales and GDP revisions have also disappointed. To be sure, the negative economic data surprises have significantly outnumbered the positive surprises. We are not making further adjustments to our Q2 GDP forecast at this point—we lowered it 50 bps last week on the heels of disappointing auto production figures, although the balance of risks again appears to have shifted to the downside.
We will wait to see the tone of next week’s economic data before making any additional changes. In particular, the May employment report will be critically important. When the April employment data were released (+244k payrolls/9.0% unemployment), we initially predicted that the May data would be even more robust—in large part due to a substantial hiring increase at McDonalds (+62k) and a normalization of unusual unemployment figures in the Household Survey in the agriculture and government sectors. Our preliminary estimates were for +300k on payrolls and a three-tenths decline in the unemployment rate to 8.7%. However, in light of the softer tone of the data—particularly the inability of initial jobless claims to recover below 400k—we are trimming our projections. We are lowering our May payroll estimate to +225k and raising our unemployment rate target to 8.9%. We will closely monitor next week’s employment sensitive data (Chicago PMI, jobs plentiful/jobs hard-to-get, ADP, ISM and claims) for any further fine-tuning, but our best estimate at this point in time is that the economic profile is softer than we initially anticipated—and May employment should reflect this.