Nonfarm Payrolls are Likely to Moderate in June, but Not Enough to Stop the Fed's Hike
Nonfarm payroll growth is likely to decline moderately in June
The US will release the June official employment report at 8:30 am EDT on Friday. The market consensus is for an increase of 200K in nonfarm payrolls.
As noted by an analyst from Wells Fargo, the likely moderation of the number is due to the declining demand of the workers, with Initial jobless claims moving up between survey weeks and the four-week average, up nearly 20% over the past year.
WARN (Worker Adjustment and Retraining Notification) data had indicated that the week ended June 24 (which included the Juneteenth holiday) would be quiet for claims - and indeed, claims declined 26k to 239k. If the WARN data are correct, the print for the week ended July 1 should mark a new high for June.
Job Postings are declining
Meanwhile, although the latest JOLTS report of April showed an increase in job openings, the Indeed Hiring Lab's data shows job postings in May and June continued to slide. That indicates a potential drop is likely to show in the next JOLTS report on Thursday.
According to Bloomberg, analysts expect May JOLTS data to show a 350k decrease in job openings to 9.75 million. The expected decline — paired with May's increase in unemployment — will likely push down the closely watched ratio of vacancies to unemployed persons to 1.6 (vs. 1.8 prior). That key ratio remains well above the 1.2 ratio before the pandemic. Besides, employees will be less likely to quit their jobs as perceptions spread that labor market is softening.
Divergent jobs reports
Although May's employment report delivered a strong rise in nonfarm payrolls with a 339K gain, the household survey added weight to the view that the labor market continues to gradually soften, with household employment contracting by 310K and the unemployment rate ticking up to 3.7%.”
The two surveys often diverge because they define employment differently, WSJ reported. For example, the self-employed are counted by the household survey but not the payroll survey, and their numbers fell sharply in May.
From 2007 to 2010, a period dominated by recession and a weak recovery, the payroll survey overstated jobs by a cumulative 1.7 million, as shown by subsequent, more comprehensive tax data.
A major cause of such overestimates is related to jobs created by startups and lost by business closures. The survey has no way of capturing businesses it doesn't yet know exist, or whether a company that doesn't respond to the survey is ghosting it, or has closed, until many quarters later, when tax data become available.
Other data to watch
According to Bloomberg, the ADP's private employment report for June is expected to show modest job gains, with a more pronounced slowdown predicted ahead due to the cumulative effect of monetary tightening.
The headline unemployment rate likely held steady at 3.7%.
Average hourly earnings likely grew 0.3% month on month. However, a decline in hours worked has stunted growth in workers’ take-home pay, muddying the read-through from wages to inflation.
How will the employment report influence the Fed's next move?
The Fed's minutes revealed yesterday signaled the“tight” labor market was still a “key factor” shaping the economic outlook. The analysis from Wells Fargo noted “Cooling in the jobs market remains incremental rather than abrupt.” If the June nonfarm payrolls still beat expectations, that will affirm Fed’s hiking in the next meeting.
The minutes showed more tightening is needed to stamp out high inflation. The upcoming data of June CPI is about to release next Wednesday.
According to minutes from June’s meeting of the Federal Open Market Committee, “almost all” officials who participated said “additional increases” in the Fed’s benchmark interest rate would be “appropriate”.
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