With the Federal Reserve inching closer to an interest rate hike this summer, economists are eyeing Friday’s jobs numbers for clues about what’s in store for Fed policy.
We expect to see another strong jobs report to close out Q2. Like the weather in summer, the labor market continues to heat up and we expect wage growth will tick up to about 2.4-2.6 percent, adding between 240,000-260,000 new jobs in June. We’re also seeing a steady stream of sidelined workers returning to the workforce and expect that number to decrease to 5.9 million, with the labor force participation rate remaining steady at about 62.8 percent.
Here are further breakdowns of three big trends to watch for in Friday’s report.
Wages Picking Up
Wage growth has been notoriously slow in recent years, hovering around 2 percent compared to the 3-4 percent annual growth of normal times. But there’s mounting evidence that earnings are on the rebound.
The best evidence comes from the quarterly Employer Costs for Employee Compensation (ECEC) survey. It counts the value of benefits to workers in addition to wages. The latest figures show pay growing at the fastest rate in a decade. Total compensation is up a scorching 4.9 percent year-over-year in March—up from 2.7 percent a year ago (see the figure below)—with growing benefits leading the way.
In last month’s jobs report, we saw a slight uptick in average hourly wage growth to 2.3 percent. That’s an improvement over past months. But because it ignores the value of rapidly growing benefits, it probably understates true pay growth. A more comprehensive view from the ECEC suggests much healthier earnings growth for workers. And that trend will accelerate as the U.S. unemployment rate inches closer to 5 percent.
What to Watch for Friday? We’re expecting improved wage growth of 2.4-2.6 percent in June. As the labor market continues tightening throughout this summer, be on the lookout for a return to 3.0 percent wage growth by year-end.
Healthy Job Growth
Last month, the U.S. economy added 280,000 new jobs, beating most economists’ expectations. Today, all signs continue pointing to the strongest job market in a generation, and we’re expecting continued good news in Friday’s jobs report.
Three clues point to a healthy jobs report this Friday. First, weekly initial unemployment claims are hovering around 270,000 per week, the lowest in 15 years. Second, the number of U.S. job openings peaked at 5.4 million in April, the highest since the federal government started collecting data in 2000. Finally, a popular measure of consumer sentiment in June hit levels not seen since before the last recession. Taken together, we’re expecting continued strong job growth throughout this summer.
What to Watch for Friday? We’re expecting between 240,000 – 260,000 new jobs added in June, and continued improvement in the unemployment rate to 5.3 – 5.4 percent.
Sidelined Workers Returning
One of the hallmarks of the last recession was the huge number of workers who were sidelined, stuck in part-time jobs or dropping out of the labor force entirely. But today, the rapidly growing job market is turning this trend around.
There are three measures of sidelined workers to watch for Friday:
- Number of Sidelined Workers: Individuals out of the labor force who say they want a job has fallen three months in row, from 6.5 million in February to 6.1 million today. At this pace, we may be back to the historical norm of roughly 4.5 million by year-end.
- Labor Force Participation Rate: The labor force participation rate has been plummeting in recent years thanks to retiring Baby Boomers and younger workers staying in school longer. But labor force participation has been essentially flat at 62.8-63.0 percent since November 2013. That suggests rejoining sidelined workers are helping offset these demographic trends.
- Broader “U6” Unemployment Rate: Finally, a broad measure of unemployment that counts many sidelined workers has fallen sharply from 11.3 percent in January down to 10.8 percent in May. That decline is evidence of discouraged workers finally rejoining the job market. At the current pace, the U6 unemployment rate will be back to normal levels within the next year.
What to Watch for Friday? We’re expecting a steady labor force participation rate of 62.8 percent, a U6 unemployment rate of 10.6 percent, and the number of sidelined workers down to 5.9 million.