The closely watched Labor Department jobs report on Friday is expected to paint a picture of an economy chugging along despite the decline in gross domestic product, the broadest measure of US economic activity, which has already begun. consecutive quarters. While demand for labor has fallen in sectors like housing and retail, which are sensitive to the higher interest rates the Federal Reserve is trying to drive in its fight against inflation, industries like airlines and restaurants are unable to find enough workers.
“The labor market is no longer a mess,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles. “But it remains quite healthy and does not fit the National Bureau of Economic Research’s broad definition of a contraction in the economy.”
The NBER, the official judge of recessions in the United States, defines a recession as “a significant decline in economic activity, spread throughout the economy, lasting more than a few months, and usually reflected in manufacturing, employment, real income, and other indicators.”
Still, last week’s government data showing a second straight quarter of negative GDP — which fits a popular rule of thumb for defining a recession — fueled the debate over whether the U.S. economy is actually in recession. and brought the July jobs report even more clearly to the attention of consumers, investors and policy makers.
According to a survey of economists by Reuters, payrolls for the non-working population likely rose by 250,000 jobs last month, after a rise of 372,000 in June. It would be the 19th straight month that the number of employees has increased, but it would be the smallest increase in that period and be below the monthly average of 457,000 jobs in the first half. Estimates ranged from as low as 75,000 to as high as 325,000.
The slowdown in job growth could ease pressure on the Fed to implement a third consecutive three-quarter percentage point rate hike at its next meeting in September, although much will depend on inflation and employment figures leading up to the meeting.
The U.S. Federal Reserve raised its key interest rate by 75 basis points last week, and officials have promised more hikes in a bid to curb inflation, which has been at four-decade highs. Since March, it has raised interest rates from near zero to the current range of 2.25% to 2.50%.
“A slowdown in job growth should be welcome news for Fed officials, but more easing in labor market conditions will be needed to curb wage inflation,” said Lydia Boussour, chief U.S. economist at Oxford Economics in New York City.
The economy shrank by 1.3% in the first half of 2022, mainly due to large swings in inventories and the trade deficit linked to halted global supply chains. Still, momentum has cooled.
Hours worked, the number of temporary workers and the breadth of job growth will be closely watched for clues about how quickly the expected recession may begin. The average work week has been around 34.5 hours for a while now.
The moderation in hiring last month was likely across the board. But government employment, which remained in the gap by 664,000 jobs in June, is a wild card as state and local government training has not followed typical seasonal patterns due to COVID-19 fallout.
This can disrupt the government’s model for extracting seasonal fluctuations from the data.
“Typically, state and local government education employment falls by 1 million in July,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “That may not have happened this year, and a smaller-than-normal decline will cause seasonal adjustment factors to inflate the adjusted data.”
Economists are also factoring in a potential decline in retail employment. High inflation — last measured at 9.1% year-over-year in the June consumer price index — is forcing Americans to spend more on low-margin foods rather than clothing and other general goods, forcing retailers such as Walmart Inc. sits with excess stock and issues profit warnings.
But the rising cost of living and fears of a recession are forcing some retirees and others who have left the workforce to look for work. That has increased the labor supply somewhat, keeping unemployment close to its pre-pandemic lows. Given the 10.7 million vacancies at the end of June and 1.8 vacancies for every vacancy, economists do not expect a sharp slowdown in wage growth this year.
As the labor market remains tight, average hourly wages are expected to increase by 0.3%, which is the same as in June. As a result, the year-on-year increase would fall to 4.9% – the lowest since December – from 5.1% in June. While wage growth appears to have peaked, pressure remains.
Data from last week showed annual wage growth in the second quarter was the fastest since 2001.
Economists will also keep an eye on employment numbers reported in the more volatile household survey, which had fallen by 315,000 jobs in June. The number of people working part-time for financial reasons will also be scrutinized after falling to the lowest figure since 2001 in June.