Expect the Payrolls Report on Friday to Indicate a Robust Job Market

The U.S. labor market continues to thrive, despite efforts to cool it down through interest rate hikes. From January to May 2023, job growth has reached nearly 1.6 million, with the trend expected to continue in June. Analysts estimate that payrolls increased by another 240,000 and the unemployment rate is projected to decrease to 3.6%. Those expecting the job market to deteriorate will have to remain patient.

“The decline of the labor market has been anticipated for the past nine months or so, but it continues to exceed expectations,” said Thomas Simon, an economist at Jefferies. “While I anticipate strong numbers this month, I believe this is likely the last period of strength before a decline.”

Despite these predictions, the labor market has consistently outperformed expectations. Companies continue to hire, and consumers continue to spend. However, with the impact of 10 rate hikes from the Federal Reserve beginning to be felt, it is increasingly believed that a reconciliation is on the horizon.

“Considering that labor force participation rates are similar to pre-pandemic levels, it suggests that there aren’t many more people available for hiring,” Simon explained.

Economist Thomas Simon described the current state of the labor market as “overcooked.”

“It’s astonishing how long it has withstood immense pressure. However, I don’t see it continuing indefinitely, unless there is a radical change in demographics,” he said.

Recent data, though, suggests that the jobs picture might once again defy expectations. Payroll processing firm ADP reported that private sector companies added an astounding 497,000 jobs in June, more than double the expected number. While ADP’s count does not always align with the government’s official numbers, it indicates potential upside in Friday’s report.

Markets reacted negatively to signs of labor market strength, as higher rates could increase the likelihood of an impending recession.

“It’s challenging for the market to accept the possibility of the Fed taking further action,” said Quincy Krosby, chief global strategist at LPL Financial. “The idea of good news being interpreted as bad news has become cliché. From the perspective that the Fed aims to achieve its goals by the end of the year, this is actually good news for the market.”

Investors interpreted higher rates as a sign of an impending recession and reacted accordingly. Dallas Fed President Lorie Logan addressed the issue in a speech, stating her belief that there is more work to be done to combat inflation. Logan was among the central bankers who favored a rate hike at the June meeting. Although the Federal Open Market Committee ultimately decided to pause tightening, officials indicated that more rate increases are likely in the future.

The market will closely examine Friday’s report for insights that will influence Fed policy. One key aspect will be wage growth. Average hourly earnings are projected to rise by 0.3% month-on-month and 4.2% year-on-year. This would bring the annual pace down to its lowest level since June 2021, a step in the right direction although still higher than the Fed’s target inflation rate of 2%.

The average workweek will also be an important metric, having steadily declined since early 2021 to its lowest level since April 2020.

Another point of interest will be any disparity between the establishment survey, which determines the headline payrolls number, and the household survey, which determines the unemployment rate. In May, payrolls increased by 339,000, while the household survey showed a decline of 331,000, primarily due to a significant drop in self-employment.

Most economists on Wall Street believe that the ADP report may have been influenced by seasonal factors and expect more moderate gains in Friday’s report. Goldman Sachs anticipates a gain of 250,000 jobs for June, above consensus estimates, while Citigroup predicts a more conservative 170,000 jobs, still consistent with the expectation of further rate hikes.

“A tight labor market that does not align with 2% price inflation should prompt Fed officials to continue raising rates in July and September,” noted Citigroup economist Veronica Clark in a client note.

In addition, another report on Thursday indicated that the labor market may be loosening slightly, as job openings declined by nearly half a million in May. This could suggest some relief ahead.