3 things to watch out for when the Department of Labor releases its jobs report

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Economists believe that inflation may be the impetus that drives up the labor force participation rate.

Patrick T. Fallon/AFP/Getty Images

Economists expect U.S. businesses added about 325,000 jobs in May, with the jobless rate falling to a pre-pandemic low of 3.5% as high inflation drives away workers and demand for labor work remains robust.

While a job count at that level in Friday’s Department of Labor report would represent a slowdown from April’s reading of 428,000, it comes as the labor market continues to heat up, with job vacancies and workers leaving near highest levels on record. The unemployment rate was 3.6% in April.

Federal Reserve Chairman Jerome Powell has pointed to the disparity between openings and jobless numbers as a sign of labor market scum, suggesting inflation may ease when it begins to return to a more balanced level. Currently, there are approximately two vacancies for every available worker.

Whether that will play out the way Powell envisions it remains to be seen, but investors are looking for clues as to how aggressively the Fed might tighten monetary policy in the months ahead. While markets have generally priced in interest rate hikes of half a percentage point at the next two Fed meetings, in June and July, the outlook for September is more mixed.

The futures market currently puts a 30% chance of the Fed raising rates by a quarter point at this September meeting and a 63% chance by a half point, a reversal of expectations from a week ago. (A higher three-quarter percentage point increase that was largely dismissed by Powell accounts for the rest of the September futures bets.)

Fed Vice Chair Lael Brainard told CNBC on Thursday that the data will dictate whether it’s a quarter-point hike or a half-point hike.

“If we don’t see the kind of deceleration in the monthly inflation prints, if we don’t see some of that really hot demand starting to cool off a bit, then it might just be appropriate to have another meeting where we proceed at the same pace,” Brainard told CNBC on Thursday. “If we see a deceleration in monthly printing, it might make sense to proceed at a slightly slower pace.”

The Department of Labor will release the May nonfarm payrolls report at 8:30 a.m. Friday. Here are some other details we’ll be watching.

Wages

Economists predict hourly wages rose 0.4% month-over-month in May and 5.2% year-over-year, with the monthly figure up from 0.3 % in April. Although these figures are higher than they have been in recent years, they do not keep pace with inflation and suggest that a wage-price spiral has not set in.

Investors looking for a clue where that number might be heading could consult the Fed’s own collection of anecdotes about its regional banking system.

While the so-called beige book report found that most of the 12 central bank districts recorded strong or moderate growth, there were indications of cooling wage pressure. “[I]In a few districts, companies noted that wage rate increases were stabilizing or declining slightly. Additionally, while companies across the country generally expect wages to increase further over the next year, one district reported that its companies’ expected rate of wage growth has fallen for two consecutive quarters. .

Labor pool

The participation rate edged down 0.2 percentage points in April to 62.2%, the first drop in several months and below the pre-pandemic level of 63.4%. More workers coming off the sidelines and looking for work could help close the gap between vacancies and workers that Powell cites as a lingering pandemic aberration and control wage growth.

And economists believe that inflation may be the impetus that drives up the participation rate.

“Financially distressed Americans who have left the workforce during the pandemic are drawn by rising costs of living and other financial pressures,” Comerica Bank chief economist Bill Adams wrote in a note. . Comerica expects voter turnout to climb to 62.3% in May.

Surprise slowdown?

The private sector jobs report released Thursday by payroll services provider ADP cast doubt on whether the government’s official report on Friday would live up to expectations.

While the ADP report is often not a reliable indicator of where Friday’s nonfarm payroll count will land, it showed the private sector added 128,000 net jobs in May, the fewest since the start. of pandemic recovery. Small businesses with 1 to 49 workers shed 91,000 jobs in May, offset by hiring gains at medium and large businesses.

Kevin Cummins, chief U.S. economist at Natwest Markets, thinks Friday’s Labor Department report will similarly surprise on the downside, as the ADP report and other labor data this week suggest a downtrend. and reduced hiring intentions.

“We think job growth is moderating (we expect average monthly job gains of 215,000 per month over the rest of the year and 150,000 per month in 2023), although even that pace is strong enough,” he wrote in a note.

Please check back after 8:30 a.m. EST for more news and analysis.

Write to Brian Hershberg at brian.hershberg@dowjones.com

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