Via Goldman Sachs’ Karen Heichgott,
We forecast nonfarm payroll growth of 225k in July, in line with consensus expectations. Many labor market indicators were softer in July, but some important service sector indicators, such as ISM nonmanufacturing employment, were significantly stronger. On balance, we expect job growth roughly consistent with the 223k increase in June.
We expect the unemployment rate to hold steady at 5.3%. Participation should at least partially rebound following an unexpected dip in June that likely reflected calendar effects. Finally, average hourly earnings are likely to rise 0.2% month-over-month in July.
We forecast nonfarm payroll job growth of 225k in July, in line with consensus expectations. Reported job availability, the employment components of most manufacturing surveys, and ADP employment growth softened, but the employment components of most service sector surveys improved, particularly the ISM nonmanufacturing survey, which surged to its strongest level since 2005. Overall, the July data point to a gain roughly in line with the 223k increase in June.
Arguing for a stronger report:
Arguing for a weaker report:
We expect the unemployment rate to hold steady at 5.3% in July, from an unrounded 5.285% in June. The headline U3 unemployment rate declined by 0.2pp in June, while the broader U6 underemployment rate declined by 0.3pp to 10.5%. Looking further ahead, we expect U3 to reach 5% by early 2016 and U6 to reach our 9% estimate of its full employment rate by the end of 2016. The participation rate showed a surprising drop of 0.3pp in June to 62.6%. However, the decline likely resulted in large part from a calendar effect caused by the timing of the reference week relative to the end of the school year (Exhibit 1), and we therefore expect an at least partial rebound in July.
Exhibit 1: Calendar Effects Probably Depressed Participation in June
We expect a 0.2% increase in average hourly earnings for all workers. While the July print should reflect some bounce-back from the flat read in June, this will likely be offset by the late timing of the reference week within the month. Average hourly earnings for all workers rose 2.0% over the year ending in June, while average hourly earnings for production & nonsupervisory workers rose 1.9%. Our Wage Tracker also stands at 2.0% year-on-year as of 2015Q2. While we expect wage growth to pick up somewhat by year-end, it will likely remain well below our 3.5% estimate of the full employment rate.
Recent data on wage growth have disappointed expectations. Our GS Wage Tracker stands at 2.0% year-on-year, showing no improvement from its average value over the past six years. Although some special factors in recent ECI and average hourly earnings data might have resulted in an unduly pessimistic view of wage growth in Q2, the broader trend remains quite subdued. We think the Fed would take comfort from a pickup in wages, as the level of wage growth provides a useful cross-check on the amount of slack remaining in the labor market. Fundamentals argue for at least a modest improvement in wage growth in coming quarters, in our view. Upcoming changes to state minimum wage laws will probably not move the needle on national aggregate wage metrics.
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