Friday’s payroll studies ought to present that the job market continues to be sizzling

A man walks past a sign reading Hire Now outside a restaurant in Arlington, Virginia, on June 3, 2022.

Olivier Douliery | AFP | Getty Images

The US job market is still burning no matter how hard policymakers try to contain the crisis.

Despite a series of rate hikes specifically designed to address an imbalance between corporate demand and the supply of labor, the workforce has risen by hundreds of thousands of jobs each month, for a total of almost 1.6 million in the first five alone months of the year 2023.

A Labor Department report on Friday is expected to show the trend continued into June. The Dow Jones consensus estimate is that the workforce has increased by a further 240,000 and the unemployment rate is expected to fall to 3.6%.

Those who are waiting for the labor market situation to deteriorate must therefore continue to be patient.

“The downfall of the job market has seemed imminent for about nine months. It continues to evolve in ways we didn’t think was possible,” said Thomas Simon, economist at Jefferies. “I think we will get strong numbers [Friday]. But my longer-term stance is that this is basically the final push.”

Lately, though, that’s proving to be a familiar refrain.

Just as economists have been counting on the US slipping into recession any day for about a year, they are looking to the labor market to lead the way. Since January 2022, wages and salaries have managed to beat consensus estimates by all but a few months as companies continue to hire and consumers continue to spend.

However, as the full impact of the Federal Reserve’s ten rate hikes is felt, there is a growing sense that a reconciliation is imminent.

“Combined with the fact that the labor force participation rates are essentially at the level of most of these pre-pandemic cohorts, that just suggests to me that there really aren’t that many more people to hire,” Simon said.

A “overcooked” job image

When asked to describe the general state of the labor market, Simon called it “overcooked”.

“It’s remarkable how long it has withstood really high pressure. But I can’t see things going like this indefinitely unless there’s a radical change in demographics,” he said.

However, the latest figures suggest that the labor market situation could again beat expectations.

Payroll company ADP reported Thursday that private sector companies added an impressive 497,000 jobs in June, more than double expectations. While ADP’s track record of matching official government figures has been spotty, the record at least points to a possible improvement in Friday’s report.

Markets rallied on signs of labor force strength and sold off on Thursday afternoon as expectations mounted that the Fed may have to be even more aggressive in raising interest rates.

“It’s difficult for the market to digest the possibility that the Fed has more work to do,” said Quincy Krosby, chief global strategist at LPL Financial. “It’s corny to say that good news is bad news. If you’re going to frame it that the Fed wants to complete its mission by the end of the year, that’s actually good news for the market.”

Investors didn’t see it that way, however, as the prospect of higher interest rates increased the chances that the much-predicted recession would become a reality.

Dallas Fed President Lorie Logan gave a speech Thursday morning saying she expects more action to fight inflation and acknowledging that she was among central bankers who welcomed a rate hike at the June meeting. The US Federal Open Market Committee ultimately voted for a pause in tightening, but officials have hinted that more rate hikes are imminent.

What to look for in the report

The market will examine Friday’s report for more points that will influence Fed policy.

Wages will be a key. The average hourly wage is expected to rise 0.3% month-on-month and 4.2% year-on-year. That would bring the annual pace down to its lowest level since June 2021, a move in the right direction, although still above what the Fed sees as consistent with its 2% inflation target.

Average weekly hours worked will also be a key metric, having declined steadily but slightly since early 2021, reaching the lowest level since April 2020.

Another point of interest will be the discrepancy, if any, between the survey of establishments, which is used to determine the total wage figure, and the survey of households, which is used to calculate the unemployment rate. In May, the number of employed rose by 339,000, while the household survey showed a fall of 331,000, almost entirely due to a sharp drop in self-employment.

On Wall Street, most economists think the ADP report was likely overvalued by seasonal factors and see more moderate gains on Friday.

Goldman Sachs, for example, said it expects a better-than-consensus hike of 250k in June, while Citigroup expects a much more modest 170k, which it says is still consistent with further rate hikes.

“Too tight labor market inconsistent with 2% price inflation should prompt Fed officials to hike rates again in July and September,” Citigroup economist Veronica Clark said in a note to clients.

Another report on Thursday suggested that the labor market could at least ease somewhat. Job vacancies fell by almost half a million in May, according to the Labor Department, which may indicate some relief.

“It’s not great news, but it’s good news,” said Rachel Sederberg, chief economist at Lightcast. “That’s the slow decline in numbers we wanted – it’s reassuring to see.”

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