Economists tend to shy away from attaching too much significance to any one piece of data. But in this environment, with this jobs report, hyperscrutiny may be warranted.
When hiring in May eked out its weakest gain in more than five years, the shock was enough to cement the Federal Reserve’s decision to hold off on raising interest rates. Then came Brexit — the U.K.’s surprise vote to withdraw from the European Union — and global economic anxieties were unleashed.
The June jobs report to be released Friday morning will therefore take on even more importance than usual. Economists and policymakers will use it to determine whether the strongest part of the economy slowed sharply even before concerns over global growth intensified, or if the labor market was merely hit by a temporary soft patch.
“There is a potential for a big reassessment on Friday for the outlook,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, N.Y. “Given how much views changed after the last report, I get the sense that the anticipation level going into this one is unusually high.”
Payrolls probably climbed by 180,000 in June, according to the median estimate of a Bloomberg survey of economists. That would follow a 38,000 increase in May that was the weakest since September 2010.
Many economists remain optimistic about the underlying trend of job growth because of other labor market indicators that still suggest health. Applications for jobless benefits remain historically low, employment indexes for both the manufacturing and service industries rebounded last month, and job openings are hovering around record levels.
The return to work of striking employees at Verizon Communications will probably help boost the June number after the walkout depressed May’s reading. Some 35,100 Verizon employees ended their almost seven-week work stoppage on May 31, Labor Department data show.
Once the strikers are factored out, “that does imply some net slowing of the trend,” O’Sullivan said. Still, that rate of hiring “remains more than strong enough to keep the unemployment rate trending down.”
The jobless rate is expected to rise to 4.8 percent after falling to a more than eight-year low of 4.7 percent in May as workers streamed out of the labor force.
Data on earnings will also take on prominence after Fed chairwoman Janet Yellen noted long-awaited signs of improvement in wage growth last month.
Average hourly earnings probably climbed 0.2 percent in June from the month before and 2.7 percent from a year earlier, according to the median forecasts of economists. The 12-month gain would be the largest since 2009.
“Readings on compensation — hourly compensation — are very noisy, so it’s hard to know, but it looks like we’re seeing somewhat faster wage growth,” Yellen said in congressional testimony on June 22. “I hope that it will be permanent.”
The predicted pickup in wage growth last month may be partly attributable to what economists call base effects — the wage number weakened in June 2015, so a bigger bounce this year may be in the cards. Looking past that, there still seems to be a nascent acceleration in pay, said Ethan Harris, head of global economics research at Bank of America Corp. in New York.
“We’re right at the point of the economic recovery where you’d be expecting wages to pick up,” he said. “It’ll probably take a couple more years to get back to 3.5 percent wage growth, which is more normal, but the process seems to have started.”
Not only is that good for workers but also for Fed policymakers. The U.S. central bank has a dual mandate of maximum employment and price stability, and while the labor-market recovery has been well underway, inflation has languished below policymakers’ 2 percent target for four years.
“It’s a sign that the Fed’s long battle to restore normal wage and price inflation is finally bearing some fruit,” Harris said.
Of course, Brexit complicates things. With U.S. economic data now being pored over for signs of weakness, there’s extra downside risk associated with a bad payroll number — anything under 100,000, Harris said.
Unfortunately, the report will offer little clarity on how employers reacted to the U.K.’s decision to leave the EU. With the referendum held June 23, any immediate impact to U.S. employment may have been limited, even as investors grew concerned that the global economy’s growth prospects have dimmed.
There’s some indication that employers are monitoring, though not yet acting, on the situation. A survey from the Institute for Supply Management showed that most purchasing executives at American factories and service producers expected a “negligible” impact on their business because of Brexit and signaled they would probably not pare head counts as a result of the vote.
The July jobs number will therefore be just as closely watched as Friday’s report.
“It could be that we get this strong employment number as expected, and the market says, ‘OK, that’s great, but it’s really old news,’ ” said Kathy Bostjancic, an economist at Oxford Economics USA in New York. “Now we’re in the brave new world of post-Brexit. That’s the risk with the payrolls data — it could be dismissed because of that.”
With investors assigning less than a 50 percent chance for a Fed interest rate hike by the end of 2017, it will take a positive shocker of a June report to get the market to recalibrate its expectations for a prolonged period of easy money, Bostjancic said.
“The push out to 2018, I think, is an extreme overreaction,” Bostjancic said. If the jobs report “shows very strong data, and particularly if wages look like they’ve moved higher, that causes the markets to double-think the idea that the Fed has been paralyzed.”