U.S. job growth likely slowed to a healthy pace in June, with the unemployment rate holding steady at 4%. This scenario increases the chances that the Federal Reserve can tame inflation without triggering a recession. The Labor Department’s employment report is expected to show annual wage growth at its slowest rate in three years, reinforcing the disinflationary trend seen in recent months.
Economists predict nonfarm payrolls increased by 190,000 jobs in June, down from 272,000 in May, with an average of 230,000 jobs per month over the past year. The economy needs to create at least 150,000 jobs monthly to keep up with the growing working-age population and recent immigration surge. The jobless rate, which rose to 4.0% in May, may drop back to 3.9% in June.
The Quarterly Census of Employment and Wages (QCEW) suggests a slower job growth pace than payroll data. The QCEW, based on employer reports to state unemployment insurance programs, likely undercounts undocumented immigrants who contributed to job growth last year. Economists expect payrolls data to be revised downward due to QCEW underreporting.
Hiring has been strong in sectors like healthcare, leisure and hospitality, and state and local government education, reaching pre-pandemic staffing levels. This trend likely continued in June but at a more moderate pace. The 525 basis points of rate hikes by the Fed since 2022 to curb inflation have impacted business formation, with excess savings from the COVID-19 pandemic now exhausted, slowing demand for labor, goods, and services.
Average hourly earnings are forecasted to rise by 0.3% in June after a 0.4% increase in May, reducing the annual wage growth to 3.9%, the smallest gain since June 2021. Wage growth in the 3%-3.5% range aligns with the Fed’s 2% inflation target. The Fed has kept its benchmark interest rate between 5.25%-5.50% since last July, and recent meeting minutes show policymakers acknowledging a slowing economy and diminishing price pressures.
Despite a cooling labor market, wage growth remains sufficient to sustain consumer spending and overall economic expansion. Economists argue that worker productivity has improved, reducing the need for the Fed to constrain the labor market further to control inflation. They caution that keeping borrowing costs high for too long could stifle economic growth, as current wage and productivity growth align with inflation targets.
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