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Jobs Boom to Roll On, But U.S. Pay Gains Still Can’t Keep Up

(Bloomberg) -- The U.S. economy probably added jobs at a healthy clip again in July. Just don’t expect wages to break out of their holding pattern.

As near-record vacancies continue to draw in workers and fiscal expansion supporting consumer demand and business investment, payroll gains have averaged 215,000 per month in 2018. That’s exceeded expectations in a tightening labor market where unemployment claims hover near a five-decade low and companies complain of a lack of workers. Yet the data keep providing evidence of unused capacity, and wage growth has failed to reach the highs seen just before the last recession.

Those trends are projected to persist in Labor Department data due Friday at 8:30 a.m. in Washington.

“A job is a job -- and you’re adding them at a very impressive pace at this point in the cycle,” said Jeremy Schwartz, U.S. economist at Credit Suisse in New York. “We don’t think you’re going to get back to the 3.5-4.5 percent range pre-crisis, because nominal GDP growth is a little bit slower than then. Which means even if bargaining power is good and the labor market is tight, you’re not going to see that really fast wage growth folks got used to in the mid-2000s and ’90s cycles.”

What to Expect From the July Jobs Report

  • Nonfarm payrolls projected to rise 193k after 213k gain
  • Unemployment rate probably fell to 3.9% from 4%, below the 4.5% level Federal Reserve officials see as consistent with full employment
  • Average hourly earnings seen rising 2.7% y/y, unchanged from prior month; seen up 0.3% m/m after 0.2% gain

With the U.S. unemployment rate so low, wages will be a key focus for bond investors trying to assess inflation, the path of Fed rate hikes and whether the longer-term trend of a flattening yield curve can reassert itself. That said, Treasury market reaction to the report has tended to be relatively fleeting in recent months. After wages missed forecasts for the June figures, yields ended the day close to the levels they were at beforehand, although the dollar finished the session lower.

While President Donald Trump’s global tariff war threatens to hamper trade and investment in coming months, interest rates remain in growth-supporting mode, with corporate tax cuts and increased federal spending acting as a boon to job creation. Fed policy makers on Wednesday upgraded their assessment of the economy to “strong” following data last week showing gross domestic product expanded last quarter at the fastest pace since 2014.

A Labor Department report Thursday showed filings for U.S. unemployment benefits were little changed last week, hovering close to a five-decade low that underscores a tight job market.

Payrolls have shown broad gains: Service providers continue to add positions, and goods-producing jobs have picked up, particularly in manufacturing, where factories have been struggling to fill orders.

Yet demand could be moderating in that sector. A factory index from the Institute for Supply Management dropped to a three-month low in July and a gauge of new orders fell to the lowest since May 2017, according to a report Wednesday. Manufacturers may have added 25,000 jobs in July, the median estimate in a Bloomberg survey, down from 36,000 in June that was near a two-decade high.

‘Something Else’

“The tax cuts are obviously supporting activity, obviously supporting consumer spending, but there was something else going on even before they came through,” said Samuel Coffin, an economist at UBS Securities LLC. That “something" is the growth in non-energy jobs, he said, such as construction, an indication of robust business conditions. “You’re seeing more activity, faster payroll growth, faster overall growth."

That signals room to run.

“There’s a question about how tight the market is. The unemployment rate certainly says yes,” yet “the pure pace of job creation which has been running 200,000 a month -- and that doesn’t sound all that tight," Coffin said. “I mean, they’re finding them somewhere.”

The solid pace of job gains -- possibly adding more workers with less experience -- may be one of the factors holding back wages. Adjusted for inflation, which has picked up partly on fuel prices, average hourly earnings were unchanged in June from a year earlier. For production and non-supervisory workers, real wages actually fell 0.2 percent in the same period for the second month in a row, the first back-to-back decline since early 2017.

What Our Economists Say

The dominant underlying theme of the July jobs report, as well as the next several jobs reports, will be continued scrutiny of labor cost dynamics as the scarcity of workers proliferates. However, in the short term, the focus will be on any indications of fallout from trade war escalation. To date, there has been little evidence of this, as supported by the fact that manufacturing employment is showing the strongest 12-month run since 1998. Analysts should watch the payroll diffusion index for signs that trade tensions are permeating the labor market, even if robust overall hiring is papering over the fissures in the interim.

-- Carl Riccadonna and Tim Mahedy, Bloomberg Economics

One broader cloud on the horizon is the impact of the trade war. Companies are considering production outside the U.S. to avoid tariffs or retaliatory levies, the head of the ISM manufacturing survey said Wednesday.

“You’re seeing a bifurcation,” as manufacturing and economic data are coming in strong, but company earnings conference calls and the Fed’s Beige Book survey tell a different story, Schwartz said. “There’s a lot of worry.”

©2018 Bloomberg L.P.