June Payrolls: Playing the Over/Under

If one trend persists, the 195,000-job consensus is too low.
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Traders trying to game Friday's employment number might want to throw away the traditional indicators and consider a simpler methodology: guessing against the consensus.

Economists are currently calling for 195,000 new jobs in June and for the unemployment rate to be unchanged at 5.1%. If recent patterns persist, the call will be low. Consider: economists overshot May's print by 112,000, undershot April's by 114,000 and overshot March's by 115,000. The story was similar in February and January.

While deeply unscientific, this system might be as useful as any in light of the number's recent volatility. It's also consistent with the general trend of recent evidence, which breaks toward the upside.

On Thursday, the Labor Department said that initial jobless claims rose by 7,000 to 319,000 for the week ended July 2. The four-week moving average stands at its lowest level in four months at 320,000. On Wednesday, the employment index of the Institute of Supply Management's non-manufacturing index came in at 57.4, the highest since February.

Add to that strong consumer confidence readings and blowout chain-store sales for June, and signs point to a Friday beat.

Arguments for a lower number generally revolve around the recently released Challenger Gray & Christmas layoff report, in which planned job cuts in the U.S. rose 35% in June to its highest level since January 2004. U.S. employers announced plans to reduce headcounts by 110,996 from 82,283 job cuts in May, bringing the total for the year to 538,274.

Some of the names getting into the restructuring game are

General Motors

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,

Ford

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,

Alcoa

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and

Lear

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. Also, expect layoffs due to the recent merger announcement between

Bank of America

(BAC) - Get Report

and

MBNA

(KRB)

.

"Unfortunately, claims for unemployment benefit insurance tell us nothing about the pace of new hiring, and judging from the spate of layoff announcements last month, businesses didn't exactly head out on a hiring spree," says Richard Yamarone, director of economic research at Argus.

"We do believe that the economy is creating jobs, only not payroll jobs," Yamarone says. "The types of jobs that are being created are of the variety contained in the household survey, which is the statistic that is used in the calculation of the unemployment rate."

Not all economists see the Challenger Report as direct evidence of a slowdown.

"We are seeing a lot of mixed economic indicators out there right now, but nothing too negative where it would dampen the market," says Michael Gregory, senior economist at Harris Nesbitt. "The Challenger report is getting overemphasized. If you back out what is taking place in the auto sector, the report is neutral."

"We are expecting a strong number of around 190,000 new jobs created in June. The unseasonably cold weather in May had a direct effect on the weak May jobs number and we should see a bounce back," Gregory says.

One thing that most economists do agree on is that the economy is experiencing moderate growth.

"We are expecting a very strong number of 275,000 new jobs created for June and are expecting an upward revision of May's number," says Brian Jones, director of market and economic growth at Citigroup. "The economy is in great shape and this is evident from the two recently released ISM reports."

"We have been seeing these seesaw payroll numbers for the last several months, and with May being so low, we should see a strong rebound," Jones says.

After digesting the initial selloff from the terrorist attacks, traders were starting to square away their positions heading into tomorrow's number.

"The market would be happy with a print of 150,000 to 175,000 new jobs," says Vincent Ambrose, senior trader at Fox Investments. "If energy prices can stay contained or decrease here, then we would see an acceleration."