The highly-watched Department of Labor jobs report on Friday is expected to paint a picture of an economy struggling despite two straight quarters of contraction in gross domestic product, the broadest measure of U.S. economic activity. Although labor demand has fallen in sectors such as housing and retail, which are sensitive to higher interest rates implemented by the Federal Reserve in its fight against inflation, industries such as airlines and restaurants cannot find enough workers.
“The labor market is no longer hot as a powder keg,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. “But it remains quite healthy and does not meet the National Bureau of Economic Research’s broad definition of a contracting economy.”
The NBER, the official arbiter of recessions in the United States, defines a recession as “a significant decline in economic activity spread throughout the economy, lasting for more than a few months, normally visible in production, employment , real income and other indicators.
Yet last week’s government data showing a second straight quarter of negative GDP – fitting a popular definition of recessions – has fueled a wide debate over whether the US economy is indeed in recession and has put the spotlight on the world. July jobs report even more prominently for consumers, investors and policy makers.
Nonfarm payrolls likely rose by 250,000 jobs last month after rising by 372,000 in June, according to a Reuters survey of economists. It would be the 19th consecutive month of payroll expansion, but the smallest increase in this period and below the first-half monthly average of 457,000 jobs. Estimates range from 75,000 to 325,000.
Slowing job growth could ease pressure on the Fed to make a third consecutive three-quarters percentage point hike in interest rates at its next meeting in September, although many Much depends on inflation and employment readings in the run-up to this meeting.
Last week, the US central bank raised its key rate by 75 basis points and officials have promised further hikes to try to contain inflation which is at four-decade highs. Since March, it has taken rates from near zero to their current range of 2.25% to 2.50%.
“Slower job growth should be good news for Fed officials, but more easing in labor market conditions will be needed to reduce wage inflation,” said economist Lydia Boussour. Principal American at Oxford Economics New York.
The economy contracted by 1.3% in the first half of 2022, largely due to sharp changes in inventories and the trade deficit linked to the stoppage of global supply chains. However, the spirit has cooled down.
Hours worked, levels of temporary workers and the extent of job growth will be watched closely for clues as to when the predicted recession might begin. The average work week hovers around 34.5 hours.
The moderation in hiring probably affected all sectors last month. But public sector employment, which remained in the hole of 664,000 jobs in June, is a wildcard, as teaching in state and local government has not followed the usual seasonal patterns due to the COVID-19 disruptions.
This could destabilize the model the government uses to eliminate seasonal fluctuations in the data.
“Normally in July, state and local government education employment drops by one million,” said Ryan Sweet, senior economist at Moody’s Analytics West Chester, Pennsylvania. “That may not have happened this year, and a smaller than normal decline will cause the seasonal adjustment factors to inflate the adjusted data.”
Economists are also watching for a possible drop in retail employment. High inflation – last measured at 9.1% year-on-year in the June Consumer Price Index – is forcing Americans to spend more on low-margin groceries rather than clothing and other general goods , leaving retailers like Walmart Inc. with excess inventory and issuing profit warnings.
But the rising cost of living and fears of a recession are forcing some retirees and others who had left the workforce to seek employment. This has somewhat increased the supply of workers, keeping the unemployment rate near its pre-pandemic low. Given the 10.7 million job openings at the end of June and 1.8 openings for each unemployed person, economists do not expect a sharp deceleration in payroll growth this year.
As the labor market is still tight, the average hourly wage should increase by 0.3%, which corresponds to the gain in June. That would bring the year-on-year increase to 4.9% – the lowest since December – from 5.1% in June. Although wage growth appears to have peaked, pressures remain.
Last week’s data showed annual wage growth in the second quarter was the fastest since 2001.
Economists will also be keeping tabs on employment levels reported in the report’s more volatile household survey, which fell 315,000 jobs in June. The number of people working part-time for economic reasons will also come under scrutiny after plunging to its lowest level since 2001 in June.