US employment and wage growth are expected to moderate in June

U.S. job growth likely slowed to a still-healthy pace in June, with the unemployment rate holding steady at 4 percent, raising the odds that the Federal Reserve will be able to tame inflation without tipping the economy into recession.

The closely watched Labor Department report on Friday is also expected to show annual wage growth rising at its slowest pace in three years. When added to the price hold in May, the report would confirm that the deflationary trend is back on track after inflation rose in the first quarter.

It could also boost Fed policymakers’ confidence in the outlook for inflation and push the U.S. central bank a step closer to starting to cut interest rates later this year.

Financial markets remain optimistic that the Fed could begin its easing cycle in September after aggressively tightening monetary policy in 2022 and 2023. Fed Chairman Jerome Powell said this week that the economy is back on a “disinflationary path “, but stressed that policymakers need more data before cutting rates.

“The economy is moving at a reasonable and sustainable rate of employment growth,” said Brian Bethune, an economics professor at Boston College. “There is no evidence of a sudden drop, nothing to suggest that we will suddenly topple over. We are still basically watching a ‘soft landing’.”

Nonfarm payrolls likely rose by 190,000 jobs last month after rising 272,000 in May, according to a Reuters poll of economists. Employment gains have averaged about 230,000 jobs per month over the past 12 months.

Economists say the economy needs to add at least 150,000 jobs a month to keep up with the growth in the working-age population, due to the recent surge in immigration.

The unemployment rate rose to 4.0% in May for the first time since January 2022, boosted by volatile youth unemployment. Some economists had expected it to fall back to 3.9% in June.

A lagged measure of employment, the Quarterly Census of Employment and Wages (QCEW), has suggested a much slower pace of job growth through the fourth quarter of 2023 than payroll data. QCEW data are derived from employer reports to state unemployment insurance (UI) programs.

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But economists argue that the QCEW data does not include undocumented immigrants, a group they believe contributed to last year’s strong job growth. The Labor Department’s Bureau of Labor Statistics will next month release its estimate of the payroll benchmark for the 12 months through March of this year.

“Payrolls are on track for a downward revision, but we think that’s not because payrolls are overstated, but because the QCEW is understated,” said Sam Coffin, an economist at Morgan Stanley. “Because the QCEW is based on UI records, it likely does not count those who are not authorized to work. If someone is not authorized to work, they are also not entitled to unemployment insurance benefits. Instead, the payroll survey asks that workers be counted regardless of legal status” .

Hiring was largely driven by sectors such as health care, recreation and hospitality, and state and local government education, which saw staffing levels return to pre-pandemic levels. This trend likely continued in June, albeit at a more subdued pace than in previous months.

Employment in these sectors is mostly returning to 2019 levels, and the Fed’s 525 basis point rate hikes from 2022 to curb inflation have weighed on business creation.

Excess savings accumulated during the COVID-19 pandemic have been depleted, helping to slow demand for both labor and goods and services.

“There was a lot of hiring that needed to be done to rethink the business,” said Sarah House, senior economist at Wells Fargo. “This is pretty much complete in a lot of different areas.”

Although the labor market is cooling, wage growth remains sufficient to sustain consumer spending and overall economic expansion.

Average hourly earnings are expected to rise 0.3% in June after rising 0.4% in May. That would reduce annual wage growth to 3.9%, the smallest increase since June 2021, from 4.1% in May. Wage growth in the 3%-3.5% range is seen as consistent with the Fed’s 2% inflation target.

The central bank has kept the benchmark overnight rate in the current range of 5.25%-5.50% since last July. Minutes of the Fed’s June 11-12 meeting, released Wednesday, showed that policymakers acknowledged that the economy appeared to be slowing and that “price pressures were easing.”

Economists argue that the labor market is not driving inflation, noting that worker productivity has picked up, and worry that the Fed could stifle growth by keeping borrowing costs high for too long.

“Wage growth was high earlier in this extension, but it has slowed,” said Kevin Rinz, senior fellow at the Washington Center for Equitable Growth. “Productivity growth has returned to the normal relationship it has with wage growth, so there’s not a huge gap between the two. It doesn’t really seem necessary at this point to tighten the labor market for the sake of reducing inflation.” .