WASHINGTON: U.S. job growth likely slowed in July after outsized gains in the prior month, with wages probably maintaining their moderate pace of increase, which could boost market expectations for another interest rate cut from the Federal Reserve next month.
The Labor Department's closely watched monthly employment report on Friday will come on the heels of Wednesday's decision by the U.S. central bank to cut its short-term interest rate for the first time since 2008.
Fed Chairman Jerome Powell described the widely anticipated 25-basis-point cut as insurance against downside risks to the 10-year old economic expansion, the longest in history, from trade tensions and slowing global growth. Powell said the move was “not the beginning of a long series of rate cuts," but also added that he was not saying “it was just one."
Nonfarm payrolls probably increased by 164,000 jobs last month after surging 224,000 in June, according to a Reuters survey of economists. The anticipated job gains would be below the monthly average of 172,000 in the first half.
“If we get a report like we are expecting tomorrow, I don't think it's going to change anything from the market's perspective of wanting another rate cut," said Josh Wright, chief economist at iCIMS in New York. “I don't think it will give the Fed the confidence to push back on the market."
Financial market expectations for a rate cut in September jumped on Thursday after President Donald Trump announced an additional 10% tariff on $300 billion worth of Chinese imports starting Sept. 1 after negotiators failed to kick start trade talks between the world's two largest economies.
Fed funds futures implied traders now see a 70% chance the Fed would lower rates again in September, up from 51% late on Wednesday, CME Group's FedWatch tool showed.
The U.S.-China trade war is taking a toll on manufacturing, with production declining for two straight quarters. Business investment has also been hit, contracting in the second quarter for the first-time in more than three years and contributing to holding back the economy to a 2.1% annualized growth rate. The economy grew at a 3.1% pace in the first quarter.
July payrolls would mark a further deceleration in job growth from an average of 223,000 per month in 2018.
“It remains unclear whether that is due more to moderating demand or to the increasing difficulty of finding additional workers at the margin," said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.
TIGHTENING LABOR MARKET
Still, the pace of job growth remains well above the roughly 100,000 needed per month to keep up with growth in the working-age population. The unemployment rate is forecast unchanged at 3.7% in July.
Despite the lowest jobless rate in nearly 50 years, wage growth has remained moderate, contributing to a tame inflation environment, which could also lead to another rate cut next month. Inflation has undershot the Fed's 2% target this year, rising 1.6% year-on-year in June after gaining 1.5% in May.
Average hourly earnings are forecasting rising 0.2% in July, after a similar increase in June. That is expected to have kept the annual increase in wages at 3.1% in July for a third straight month. The trend in wage gains has slowed from late 2018 when wages were rising at their fastest rate in a decade.
Even with the step-down in job and wage gains, the labor market is supporting the economy, which is slowing as the stimulus from last year's $1.5 trillion tax cut package fades. Economic growth in the third quarter is seen at around a 1.5% rate
“The employment report will be a critical element in determining how the third quarter is starting off," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “Extended labor market gains would support further solid consumer spending growth."
The retreat in job growth in July is expected to have been concentrated in the goods producing sector of the economy and government, after strong gains in June, which were not supported by other data.
Manufacturing employment is forecasted rising by 5,000 jobs after accelerating by 17,000 in June. Factory payrolls could surprise on the downside after a survey on Thursday showed manufacturing employment hit its lowest level since November 2016 in July.
The sector, which accounts for more than 12% of the U.S. economy, is being hobbled by trade tensions, weakening global growth, an inventory bulge – concentrated in the automotive industry – and design problems at aerospace giant Boeing Co .
Construction payrolls are also expected to slow after shooting up by 21,000 jobs in June. A moderation in government employment is anticipated after payrolls surged by 33,000 jobs in June, the most since August 2018.
The average workweek is seen unchanged at 34.4 hours in July for a fourth straight month.