U.S. job growth likely moderated in June, with the unemployment rate remaining steady at 4%, boosting hopes that the Federal Reserve can tame inflation without triggering a recession. The Labor Department’s closely watched employment report on Friday is expected to show annual wage growth rising at its slowest rate in three years. Combined with a moderation in prices in May, this would confirm the return of the disinflationary trend after inflation surged in the first quarter.
The report could bolster Fed policymakers’ confidence in the inflation outlook, moving the central bank closer to cutting rates later this year. Financial markets are optimistic that the Fed could begin its easing cycle in September, following aggressive tightening in 2022 and 2023. Fed Chair Jerome Powell remarked this week that the economy is back on a “disinflationary path,” but emphasized the need for more data before reducing rates.
“The economy is moving into a reasonable and sustainable pace of employment growth,” said Brian Bethune, an economics professor at Boston College. “There’s no evidence of any sudden decline, nothing that would suggest we’re suddenly going to tip over. We’re still basically tracking a ‘soft landing.'”
Economists surveyed by Reuters predict that nonfarm payrolls increased by 190,000 jobs in June, down from 272,000 in May. Employment gains have averaged about 230,000 jobs per month over the past year. To keep up with the growth in the working-age population, including recent immigration surges, the economy needs to create at least 150,000 jobs per month.
The jobless rate rose to 4.0% in May, driven by volatile youth unemployment. Some economists expect it to drop back to 3.9% in June. However, the Quarterly Census of Employment and Wages (QCEW) suggests a slower pace of job growth through the fourth quarter of 2023 compared to payroll data. The QCEW data, derived from employer reports to state unemployment insurance programs, is seen as a lagging measure.
Economists argue that the QCEW data does not account for undocumented immigrants, who they believe contributed significantly to job growth last year. The Labor Department’s Bureau of Labor Statistics will publish its payrolls benchmark estimate for the 12 months through March next month.
“Payrolls are on track to be revised downward, but we believe that’s not because payrolls are overcounting but because QCEW is undercounting,” said Sam Coffin, an economist at Morgan Stanley. “Because QCEW is based on UI records, it likely misses those not authorized to work. If one’s not authorized to work, one is not eligible for unemployment insurance benefits. In contrast, the payroll survey asks that employees be counted regardless of legal status.”
Hiring has been robust in sectors such as healthcare, leisure and hospitality, and state and local government education, which have been returning to pre-pandemic staffing levels. This trend likely continued in June, albeit at a more moderate pace. However, the 525 basis points worth of rate hikes from the Fed since 2022 have weighed on business formation.
Excess savings accumulated during the COVID-19 pandemic have been exhausted, contributing to a slowdown in demand for labor, goods, and services. “There’s been a lot of catch-up hiring to get businesses re-staffed,” said Sarah House, a senior economist at Wells Fargo. “That’s largely complete across many sectors.”
Despite the cooling labor market, wage growth remains strong enough to sustain consumer spending and overall economic expansion. Average hourly earnings are forecast to have risen 0.3% in June, down from 0.4% in May. This would reduce the annual wage increase to 3.9%, the smallest gain since June 2021, from 4.1% in May. Wage growth in the 3%-3.5% range is seen as consistent with the Fed’s 2% inflation target.
The central bank has kept its benchmark overnight interest rate in the 5.25%-5.50% range since last July. Minutes from the Fed’s June meeting showed policymakers acknowledging the economy’s slowdown and diminishing price pressures. Economists argue the labor market is not driving inflation, noting improved worker productivity, and caution that the Fed could stifle growth by maintaining high borrowing costs for too long.
“Wage growth had been high earlier in this expansion, but it’s come down,” said Kevin Rinz, a senior fellow at the Washington Center for Equitable Growth. “Productivity growth has returned to its normal relationship with wage growth, such that there’s not a huge gap between the two. It doesn’t seem necessary to constrain the labor market to reduce inflation.”
