Big jobs report Friday: Strong payrolls growth expected for July with unemployment rate set to fall to 3.9%

July’s employment report is expected to show solid job growth of 190,000, but wage growth is expected to remain on the tepid side, at about the same pace as last quarter.

The unemployment rate is expected to improve to 3.9 percent from 4 percent, and average hourly wages are expected to grow by 0.3 percent, or 2.7 percent on a year-over-year basis, according to Thomson Reuters. In June, 213,000 nonfarm payrolls were created, and average wages grew by 0.2 percent or 2.7 percent year over year. The July report is expected at 8:30 a.m. ET Friday.

There have been other anecdotal signs of a pickup in wage growth, but economists still expect choppiness. Some data is also improving. For instance, the employment cost index for the second quarter showed a 0.6 percent gain for civilian workers, and the 12-month rate is now 2.8 percent, the best since the third quarter of 2008, according to Tuesday’s release.

Amherst Pierpont chief economist Stephen Stanley points out that the NFIB small business survey shows a pickup in wages and also in compensation plans for the next six months, both numbers that are close to all-time highs in the data, which dates back to 1984.

But in the average hourly wage data, economists have been watching for a pickup to a 3 percent or better pace, which would be a more healthy gain and a sign of coming inflation. The markets are most closely watching the wage data, since a more rapid rate of growth could signal the Fed that it needs to stay on its interest rate hiking path or even speed it up, if wage growth at a higher level is sustained.

“Unless we get a nice outlier number of 0.5, you’re not going to move much year-over-year on wage gains. I think there are some hurdles to get there. We need a big surge in manufacturing and higher paid jobs to get there,” said Diane Swonk, chief economist at Grant Thornton. “I think we’re going to see the surge in health and leisure and hospitality…There’s been a change in the composition of jobs. We have a lot of lower wage gobs that were generated in the U.S. economy “

“We would love to see 3 percent sustained. Historically, 3 percent sustained should get you to 2 percent inflation sustained,” Swonk said.

For the July report, both Goldman Sachs and JP Morgan economists forecast a lower than consensus 0.2 percent increase, or a 2.6 percent year-over-year pickup in average hourly wages. Goldman blames the softer number on calendar effects on the July data. Stanley notes that in the past eight months, average hourly wages have shown monthly gains of less than 0.2 once; around 0.2 percent three times and 0.3 percent or more four times.

“I think we’ll touch 3 percent before the end of this year but we may not move above 3 percent on a persistent basis until next year,” Stanley said. He added that one risk to his view is the unknown impact of Trump administration trade policy and tariffs, since they could slow growth.

Economists agree that wage growth is frustrating, but there also are a myriad of excuses. Stanley said Fed research shows that the dynamics of higher paid baby boomers retiring and lower paid millennials replacing them has taken about a half percent from wage growth.

He said the biggest culprit could be low productivity.

“In past cycles, people say wages were growing at 3.5 percent…and they’re only in the 2s now. The productivity was way lower now than it was then,” said Stanley. “From a broad perspective, I think that’s the most important issues.” He said productivity has been averaging just 0.6 going back to 2011.

“We may not have broad agreement on what’s going on. Part of it’s a function of innovation in the economy, which tends to come in spurts. it just seems a lot of technology advances in the last five years aren’t the kind of thing that point to productivity gains,” he said.

“Having Facebook, Snapchat and Twitter are great, but they’re not adding to productivity,” said Stanley. He said big moves came with computing and the internet.

Stanley said business investment could be one culprit behind the lower productivity and that could improve now that the tax law changes have provided incentives to spend.