Job growth was likely strong in July, but could slow soon

An employee checks out a customer at Paulina Meat Market in the Lakeview neighborhood of Chicago, Illinois on June 28, 2022.

Bianca Flowers | Reuters

Employers likely added fewer jobs in July, but the monthly jobs report should still show a robust pace of hiring that is expected to decline slightly over the next few months.

Economists expect 258,000 jobs to have been created, up from 372,000 in June, according to Dow Jones. Unemployment should remain at 3.6% and wages should increase by 0.3%. The jobs report is released Friday at 8:30 a.m. ET.

“I think it should be a straight-to-the-strike-zone type report,” said Mark Zandi, chief economist at Moody’s Analytics. “You have more layoffs, initial applications are up and you have fewer hires because vacancies have gone down. … We were close to 400,000 [new jobs] last month, 500,000 the previous month. The models say 225,000.”

The job market is changing. Hiring is expected to slow as the Federal Reserve raises interest rates to calm inflation — and the economy. But businesses are still looking to hire as they grapple with labor shortages.

This consideration and a shift in consumers towards services, such as travel rather than goods, means that some industries are experiencing strong growth while others are potentially in decline. For example, more jobs are expected in health care, recreation and entertainment, but less in manufacturing. Construction jobs could post a loss.

“As long as you’re above 200,000, you’re still doing better than before the pandemic and that’s still strong,” said Diane Swonk, chief economist at KPMG. “It doesn’t feel very good, because it comes with inflation.”

Companies such as Walmart, Amazon and Tesla have already forecast layoffs, and economists expect to see more job losses in construction, technology, retail and finance companies, among others.

As the Fed continues to raise interest rates, economists expect more and more steam to emerge from the labor market. By the end of the year, some say the huge gains in monthly job growth could turn into real declines. By then, the Fed’s target interest rate, at zero before its rate hike in March, could be between 3.25% and 3.5%, according to the central bank’s latest forecast.

The scourge of equal opportunity

“Right now, inflation is hurting everyone. It’s a blight on equal opportunity at this point,” said Michael Gapen, chief U.S. economist at Bank of America. “What policymakers are facing is driving up the unemployment rate.”

Inflation continued to soar in June, with the consumer price index jumping 9.1%. But economists expect inflation to have peaked and job growth now also appears to have peaked.

“Somewhere here there is going to be an inflection point,” Gapen said. “The trend in unemployment claims suggests this is ahead of us. Unemployment claims have been rising since April, but are still very low compared to historical trends.”

Weekly jobless claims rose by 6,000 to 260,000 for the week ended July 30, near the highest level since last November.

Gapen expects that by the end of the year, job growth will turn negative, followed by the possibility of several monthly reports of job losses of up to 150,000. He expects this that a shallow recession sets in by then.

Swonk said she also sees payrolls turning negative, with monthly job losses of between 100,000 and 200,000.

Zandi said he does not currently expect a recession and believes the central bank is trying to engineer a soft landing without big job losses. He said the payroll numbers could be around zero.

“If the Fed could draw a line, the line it would draw is you go up to negative numbers and you have even higher unemployment. You take the steam out of any growth in wages. have in mind,” Zandi said.

Zandi said job growth in a healthy economy may be closer to 100,000 than the huge monthly numbers that came as the economy rebuilt after the Covid-19 shutdowns. According to the Bureau of Labor Statistics, the private sector payroll exceeded the number of workers in February 2020 by 140,000 employees.

Fed Chairman Jerome Powell said the strength in the labor market was one of the reasons he doesn’t think the economy is currently in recession, despite consecutive quarters of negative gross domestic product. Typically, two quarters of contraction could indicate a recession, as well as other factors, such as rising unemployment, but, for now, the economy is considered to be only in a technical recession.

This jobs report is one of two the Fed will see before deciding how much to raise interest rates at its September meeting. Some economists expect policymakers to slow his rate hikes and hike by just half a percentage point instead of the three-quarter-point hikes he made in June and July.

Focus on wage growth

Markets will depend on the strength of the number of workers added and wage growth, which should slow slightly. Wages are expected to rise 4.9% from the year-ago period, slower than June’s 5.1% pace.

“Given that we rallied pretty well on the number, there are more opportunities for disappointment than positive surprises for the markets,” said Sameer Samana, senior global markets strategist at Wells Fargo Investment Institute. “If you get positive information that the labor market is cooling and cooling rapidly, that could spur further recovery from here.”

Samana said if salaries were higher than expected, investors would be disappointed. “That might trigger a bit of selling, as people lean towards this expectation that inflation will go down and the Fed might pivot soon. For us, that’s a mistake.”

The Wells Fargo Investment Institute expects unemployment to reach 4.3% by the end of 2022. Samana.

“You could see companies becoming a lot more hesitant to hire,” he said. Samana added that there might be some labor hoarding. “We hear from companies saying that it is so hard to hire that they will retain their employees during the recession.”

Gapen said if the number of jobs were in line with expectations or stronger, it would strengthen the Fed’s hawkish stance.

“What does it bring from the Fed? It brings more tightening,” Gapen said. “Stronger data right now means more Fed tightening. This is not a world where the Fed is going to lean against a slowing labor market. They actively want that.”

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