Ten years into the recovery, the economy’s ability to create new jobs may be slowing both because the U.S. is running out of workers, and also because the trade war may be worrying employers.
Economists expect to see 165,000 jobs were added in June, after a stunningly low 75,000 payrolls added in May, according to Dow Jones. But a soft ADP report Wednesday, with just 102,000 new private payrolls dampened expectations for the government’s June payroll report, which will be released Friday.
The jobs report is also seen as a major input for the Fed to consider when it meets at the end of the month, and if there is more weakness than expected in job growth or wages data, it could be another catalyst for an expected interest rate cut. In the June report, the unemployment rate is expected to hold steady at 3.6%, while average hourly wages are expected to increase by 0.3%, or 3.2% year over year, up from 3.1% in May.
“We’ve known for a while with a very low unemployment rate that we’re running out of workers. Payroll gains are going to slow at some point. I don’t know if this is the point or not. I don’t’ trust the ADP number. I don’t know if the day of seeing 200,000 job numbers is over,” said Chris Rupkey, chief financial economist at MUFG Union Bank.
ADP is not seen as a strong indicator for the government’s employment report, but in May, its initial report of just 27,000, later revised to 40,000 jobs, sent a strong message about a hiring slowdown that later showed up in the government’s weak May report.
On the other hand, some employment indicators remain strong. Weekly jobless claims data, viewed as the most current data on the labor market, fell by 8,000 to 221,000 in late June, signaling a solid enough jobs picture when it was released Wednesday.
But ADP’s data also contained some worrisome details, such as the decline of 37,000 jobs in companies employing one to 19 people. “The thing that’s really puzzling is the slowdown in small business hiring. That’s really the engine for job growth in the economy. Seeing that slowdown is concerning,” said Tom Simons, money market economist at Jefferies.
So far, it’s not clear how much employers are holding off on hires because they are fearful about an economic slowdown, and uncertainty about trade or tariffs. But other data, showing slower manufacturing activity and weaker investment spending has been a concern.
“Certainly, it would be a problem if jobs were weak for a second month in a row. For the Federal Reserve, they’re certainly worried and teed up to cut rates on July 31. Any weakness in payrolls for a second month would be a virtual green light for a Fed rate cut,” said Rupkey. “It’s not going to be shocking for the market…But is the economy really ready to go into a tailspin with an actual downturn here? It just doesn’t feel like it. Consumer spending is still high.”
But the average hourly wage number inside Friday’s report could also be a factor for the Fed, especially if it’s shy of expectations.
“Expectations are for a deceleration in job growth. Job growth is decelerating quite sharply from 2018. The real issue for the Fed is what’s wage growth, and it’s not been promising of late,” said Diane Swonk, chief economist at Grant Thornton. “We’ve seen 3.1% after hitting a peak of 3.4%. If we stay in that 3% range, that’s enough for the doves at the Fed to go. The question is can they bring the hawks along with them. They’re really going to be looking at the wage number.”
Moody’s Analytics chief economist Mark Zandi, said he expects 135,000 jobs were added in June and that the report will show both a lack of workers and the impact of trade wars and tariffs on the economy. The ADP report is published in collaboration with Moody’s. Zandi said the ADP report reflects just private sector hires, and he expects a surge in government workers in June.
“I think the trade war is causing real damage. We were going to see some slowdown anyway because we were not going to be able to fill these open positions. This feels like it’s more than that. We went from a monthly gain of 225,000 last year to 165,000, and the recent numbers suggest we could be at 125,000 to 150,000. That’s more than can be explained than that people can’t find workers,” said Zandi.
At J.P. Morgan, economists are expecting a below consensus 140,000 jobs in June.
“We are watching the different labor market reports for information about how the job market is responding to recent news on trade policy and other economic developments. While there have been occasional worrisome readings, overall it looks like the trend in job growth is cooling, but not in an especially severe way. We continue to forecast that Friday’s BLS report will show nonfarm job growth of 140,000 in June,” wrote economist Daniel Silver.
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