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Friday’s jobs report could provide a crucial piece in the increasingly complex puzzle of the U.S. economy and its long-awaited slide into recession.
Wall Street forecasters expect nonfarm payrolls to rise by 200,000 in July, a number that would be the smallest increase since December 2020, while the unemployment rate is expected to remain steady at 3.6%. June saw a profit of 209,000, and the total for the year to date is around 1.7 million.
While slower job growth might fit the narrative that the U.S. is headed for a contraction, other metrics like GDP, productivity and consumer spending have been surprisingly strong lately.
That could make wage numbers a key arbiter of whether the economy is headed for a recession, and whether the Federal Reserve should keep raising rates to keep inflation in check, which is still well above its desired target. the central bank is located.
“This will most likely be a report that means something to everyone, whether you want to avoid a full-blown recession, a soft landing or an outright recession by the end of the year,” said Jeffrey Roach, chief economist at LPL Financial. “The challenge is that not every metric tells the same story.”
Within the numbers
For economists like Roach, the clues to what the generally backward-looking report says about the future lie in some hidden numbers: labor force participation in the highest age groups, hours worked and average hourly wages, and the sectors where job growth is increasing. was the highest.
For example, the prime age participation rate focuses on the cohort of the 25 to 54 age group. While the overall rate has remained stagnant at 62.6% over the past four months and is still below pre-pandemic levels, the prime age group has risen steadily, if incrementally, and is currently at 83.5% , half a percentage point. above where it was in February 2020 – just before Covid hit.
Rising participation means more people entering the labor market and easing wage pressures that have contributed to inflation. However, lower employment rates have also been a factor in wage increases that continue to defy expectations, especially amid a series of Fed rate hikes aimed specifically at bringing excessive demand back in line with labor market supply.
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“The sustainability of this labor market is largely because we simply don’t have the people,” said Rachel Sederberg, senior economist at job analytics firm Lightcast. “We have an aging population that we need to support with much smaller groups of people: the millennials, generation X. They don’t even come close to the baby boomers who have left the workforce.”
Hours worked is a factor in productivity, which unexpectedly rose 3.7% in the second quarter as the length of the average working week decreased.
The jobs report will also provide an overview of which sectors are adding the most. Much of the recovery has been leisure and hospitality, along with a variety of other sectors such as healthcare and professional and business services.
Wages will also be a major problem. Average hourly wages are expected to rise 0.3% this month and 4.2% from a year ago, which would be the lowest annual increase since June 2021.
Collectively, the data will be looked at to confirm that the economy is slowing enough that the Fed can start easing monetary policy due to a slowing labor market, but not because the economy is in trouble.
Balancing act
The payrolls will be “a litmus test for markets amid a raft of economic data that continues to point not only to a resilient U.S. economy, but also to one that may face renewed risks of overheating,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management.
RBC expects wage growth below the consensus of 185,000 due to “cooling labor demand.” [is] Ultimately, this will likely reinforce growing economic scenarios of a soft landing,” Garretson said.
However, Goldman Sachs is looking for a hot number.
The company, which is perhaps the most optimistic on Wall Street regarding the economy, expects to add 250,000 employees due to the expected strength in summer hiring.
“Job growth tends to remain strong in July, when the labor market is tight – due to strong hiring of summer workers – and three of the alternative employment growth measures we track indicate a strong pace of job growth,” said Goldman economist Spencer Hill. a client note.
These measures include job data from alternative sources, the number of job openings from the Labor Department, and the company’s own employer surveys. Hill said labor demand is “down meaningfully” from the peak a year ago but is still “elevated” by historical standards.
Homebase data shows that small businesses are still hiring, but at a slower pace. The company’s Main Street Health Report shows that the number of employees fell 1.2% in July, while hours worked fell 0.9%. However, wage growth rose 0.6%, suggesting the Fed may still be feeling the pressure even if wage numbers are lower.
The trick, says Lightcast economist Sederberg, is for the labor market to cool but not collapse.
“We want to see a slow retreat from the unrest we have seen in recent months and years. We don’t want to see a crash and jump back to the 5% unemployment rate we had about a decade ago. ,” she said. “So slow and steady wins the race here.”
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