(Bloomberg) -- Forecasters anticipate a monthly report on US employment will show moderating job and wage growth in July, underscoring an ongoing softening in the labor market.
Payrolls probably rose by 175,000 last month following June’s 206,000 increase, according to the median estimate in a Bloomberg survey. Average hourly earnings likely rose just 3.7% from a year earlier, the least in three years, the report due Friday from the Bureau of Labor Statistics is expected to show.
The unemployment rate, meanwhile, is seen holding at 4.1%, the highest since November 2021, following increases in each of the last three months.
Federal Reserve officials are widely expected to begin lowering interest rates in September and investors are betting on additional reductions in November and December, according to futures. A weaker-than-expected report would likely supercharge bets on rate cuts in increments of more than a quarter-percentage point.
“Attention has shifted to the labor market and the steady rise in the unemployment rate,” Citi economists led by Andrew Hollenhorst said Thursday in a note. “Risks remain skewed toward deeper or faster cuts.”
Here’s what to watch for in key components of the report:
Nonfarm Payrolls
Forecasters see monthly job gains extending a gradual slowdown in July after the second quarter marked the slowest pace since the onset of the pandemic in 2020. A surge in immigration is believed to have lifted payrolls over the past two years, though monthly border crossings now appear to be trending lower.
“The pace of immigration likely slowed sharply at the start of the year. As a result, we expect less of a boost to nonfarm payrolls from this channel,” Goldman Sachs economists Ronnie Walker and Jessica Rindels said Thursday in a note previewing the report. They said they estimate above-trend immigration increased labor supply by about 80,000 per month in 2023, and expect a 50,000 per month boost in 2024.
Economists also cited Hurricane Beryl, which made landfall in Texas in early July, as a potential downside risk for the monthly payroll reading, though most said they expected only a limited impact on reported headcount.
Weather-related disruptions to payrolls and hours worked tend to reverse in subsequent months, but other, more persistent factors suggest the underlying pace of payroll gains is weak, Bloomberg Economics economists led by Anna Wong wrote in a note. They anticipate that the slowdown in the labor market will go beyond the “gradual normalization” Fed Chair Jerome Powell described after the central bank’s meeting this week, and the jobless rate will rise to 4.5% by year-end.
Hourly Earnings
While wage growth is seen slowing based on underlying trends in bargaining power, Hurricane Beryl could give an “artificial lift” to the figures in July, according to EY Senior Economist Lydia Boussour.
“In June, the number of workers voluntarily quitting their jobs reached its lowest level since February 2018 outside of the pandemic, suggesting that workers’ confidence in the labor market is fading and that their negotiation power is waning,” Boussour said in a July 31 note previewing the numbers.
She added that wage growth could continue cooling further, to about 3.5% by the end of the year, “a pace consistent with the Fed’s 2% inflation target and productivity around 1.5%.”
Labor Force
Recent increases in the US unemployment rate have brought it close to triggering a recession indicator developed by former Federal Reserve economist Claudia Sahm that has a perfect track record over the last half-century. Another rise in Friday’s report, defying consensus expectations, would surely amp up concerns in financial markets about recession risk.
Either way, analysts will be poring over the details underneath the headline unemployment rate as they debate how concerning the recent increase really is. A more benign interpretation links it to a higher labor force participation rate, which is expected to hold steady at 62.6% in July after ticking up the month before.
“Some of the recent increase in the unemployment rate reflects growth in the labor force, which for prime-age workers was 83.7% in June, the highest since 2002,” Nancy Vanden Houten, lead US economist at Oxford Economics, wrote in a July 31 note previewing the numbers. “The rise in the unemployment rate has not been broad-based among demographic groups, making it less worrisome.”
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