Insight into U.S. Job Creation: July Employment Report Preview

The upcoming July U.S. employment report is expected to provide insight into the state of job creation in the country. While Wall Street anticipates a slight decline in the number of new jobs added, the labor market has displayed unexpected resilience.

Job Growth Expectations

According to economists surveyed by the Wall Street Journal, the U.S. is projected to add approximately 200,000 new jobs in July. Although this figure is lower than the previous month's 209,000, it is important to note that the labor market remains robust overall.

Labor Market Strength

Despite the impact of rising interest rates and a relatively slower economic growth compared to the previous year, the labor market remains strong. Traditionally, a 200,000 increase in new jobs would be considered positive news. However, given the present circumstances, it might not have the same level of enthusiasm.

The Federal Reserve has stated that adding 100,000 jobs per month is sufficient to accommodate the influx of individuals entering the labor force. Going beyond this threshold could potentially lead to labor shortages, wage inflation, and increased overall inflation.

Unemployment

Forecasts suggest that the percentage of unemployed Americans will remain steady at 3.6% in July, maintaining its position close to a half-century low. Remarkably, this unemployment rate has remained unchanged since the Federal Reserve began raising interest rates 16 months ago as a measure against inflation.

Initially, the expectation was that higher interest rates would dampen economic growth, resulting in increased layoffs and a surge in unemployment rates to around 4.5% or higher. However, current predictions suggest that the jobless rate may not exceed 4%, if it even reaches that level.

Worker Compensation

Average hourly wages are projected to experience a slight slowdown in their growth rate, with a 0.3% increase expected in July. This follows three consecutive months of slightly larger increases.

Overall, the upcoming employment report will provide valuable insights into the U.S. job market. While some indicators may suggest a slight decline in job creation, there are still signs of a resilient labor market with minimal unemployment and steady wage growth.

Labor weak spots

Despite the Federal Reserve's desire for a softer labor market, it hasn't softened as much as expected. However, there are signs of a slowdown.

Hiring in Decline

One indicator of this slowdown is the decrease in the number of industries that are hiring. The monthly jobs report includes a diffusion index that measures the percentage of industries gaining jobs compared to those losing jobs. In June, this index fell to 58% from a record 84.6% in early 2022.

Most of the recent hiring has been in the leisure and hospitality sector, including hotels, restaurants, theaters, and amusement parks. Although employment levels have recently returned to pre-pandemic levels, a decrease in the diffusion index would indicate underlying weakness in the labor market.

Fed reaction

The Federal Reserve is currently considering whether to raise interest rates again in September.

If there is a smaller increase in jobs in July and further slowdown in wage growth, it would support the case for maintaining current rates. On the other hand, a significant increase similar to what ADP reported would concern the Fed and dampen market sentiment.

While some senior Fed officials are undecided about raising rates again, another does not see a need for a rate hike next month based on the current trajectory of inflation.