Jobs report should show solid but slower trend of hiring

The economy is expected to have added 165,000 jobs in July, a drop of about 60,000 from June and possibly the start of a more moderate hiring trend as the economy edges toward full employment.

The jobs report, the most important data of the month, is being released Friday at 8:30 a.m. ET, capping a week that saw the Federal Reserve’s first rate cut in more than a decade and wild swings in financial markets.

But with expectations for Fed rate cutting tethered more to the issues of trade war uncertainties, global economic weakness and low inflation, the jobs report is unlikely to have much market impact unless it is surprisingly weak.

“If the number is good, so let’s say 175,000 or something closer to 200,000, that’s not really going to change the Fed’s thinking because the Fed already sees labor in a good place and households in a good spot,” said Michael Gapen, chief economist at Barclays. “A strong number doesn’t really change anything, but obviously a weak number would.”

The Fed cut rates by a quarter point on Wednesday, its first rate cut since December 2008. The markets were disappointed by comments from Fed Chairman Jerome Powell that the cut was not part of a longer-term rate- cutting cycle. Even so, the bond market moved dramatically to price in lower rates Thursday, as inflation expectations fell. The downward move picked up even more steam after President Donald Trump threatened more tariffs on China.

The fed funds futures market went from pricing in just over 50% odds of a September hike Thursday morning to nearly 100% by Thursday afternoon.

Gapen said he expects 165,000 new jobs, and the lower number reflects a payback from manufacturing and government sector payroll growth, which where higher than expected in June. He also expects the unemployment rate to decline to 3.6% from 3.7% and average hourly wages to rise by 0.2%. Job growth for the three months ending in June averaged 171,000.

The consensus forecast of economists surveyed by Dow Jones was for a gain of 165,000 July nonfarm payrolls, a small drop in unemployment to 3.6% from 3.7% and average hourly wage growth of 0.2% or 3.1% year over year.

“Everything points to a kind of a down-the-fairway report,” said Mark Zandi, chief economist at Moody’s Analytics. “We will probably see a decline in the unemployment rate and it will notch back toward 3.5%. It indicates the economy that is just growing at potential.”

Zandi said a risk for the labor market would be if business confidence is hurt even more, and that could happen if more tariffs are put on Chinese goods by the president. “I think the economy is in a very fragile place, and I think business sentiment is on a razor’s edge. If he pulls the trigger on this, business is going to reevaluate and pullback on hiring, and we’ll go below potential.”

Some economists were more optimistic about July’s job creation. Goldman Sachs economists forecast 190,000 nonfarm payrolls, with 10,000 to 20,000 government jobs added due to the census.

“Additionally, we believe Hurricane Barry struck the Gulf Coast too late in the survey week to have a significant impact on the report,” the economists wrote in a note. The hurricane, which brought flooding to the region, also resulted in the temporary shutdown for several days of significant oil and gas operations in the Gulf of Mexico.

Economists also said the wages number will be important if it is either lower or higher than expected, since it is an inflation indicator for markets and could have implications for Fed expectations.

Strategas chief economist Don Rissmiller said for markets, a big swing in payrolls in either direction would be important to markets. “You wouldn’t want a [below] 100,000 number, but a plus 100,000 somewhat weak report is probably something that’s OK for risk assets because it would invite more Fed easing. It would give the green light for other central banks to do the same thing. Too strong would be 200,000 or something like that,” he said.