Payroll gains set to accelerate while labor shortages still weigh

The U.S. economy likely added back jobs for a sixth straight month in June, with job growth picking up speed alongside the reopening economy. 

The U.S. Labor Department is set to release the June jobs report Friday morning at 8:30 a.m. ET. Here are the main metrics from the report, compared to consensus estimates compiled by Bloomberg:

  • Change in non-farm payrolls: 720,000 expected vs. 559,000 in May

  • Unemployment rate: 5.6% expected vs. 5.8% in May 

  • Average hourly earnings, month-over-month: 0.3% expected vs. 0.5% in May

  • Average hourly earnings, year-over-year: 3.6% expected vs. 2.0% in May

Non-farm payrolls disappointed in the past two monthly reports, and worker supply shortages have capped the pace of the recovery across numerous industries. Other data have underscored these challenges, with the Institute for Supply Management’s June manufacturing employment index dipping into contractionary territory for the first time since November, mentions of “shortages” more than doubling in the Federal Reserve’s June Beige Book compared to January, and companies from FedEx (FDX) to Paychex (PAYX) citing difficulties in hiring. 

Still, payroll gains are expected to have accelerated in June to the fastest pace in three months, when an initial wave of reopenings in the spring helped fuel a burst of rehiring.

“A pick-up in payroll growth is likely over the coming months, but it is unclear whether constraints that are causing labor supply shortages will be resolved before September,” Rubeela Farooqi, chief U.S. economist for High Frequency Economics, wrote in a note. 

These supply constraints have also pushed up wages. Average hourly earnings are expected to increase to a 3.6% year-over-year rate, up from the 2.0% registered in May. This would be the fastest pace since March. But wage gains likely decelerated on a month-over-month basis, slowing to 0.3% in June from 0.5% in May. 

“The wage growth is really what I’m going to be focusing in on. Because as we know, the Fed and inflation is really driving markets right now, Ryan Nauman, market strategist at Informa Financial Intelligence, told Yahoo Finance. “The wage growth is going to be a big contributor to how transitory or how temporary, is inflation.”

The biggest payroll gains so far this year have been in the leisure and hospitality industries, which were the hardest hit in the earlier stages of the pandemic. The labor deficit across these industries — with leisure and hospitality still down by 2.7 million jobs compared to February 2020 levels — comprises the plurality of the 7.6 million total jobs the economy still has left to recover from before the pandemic. 

Some economists and public officials have pointed to the federal enhanced unemployment benefits as one factor weighing on the pace of labor force reentry. While just one of a number of contributing factors, some are expecting a pick-up in filled positions once these benefits sunset across about half of U.S. states over the summer, and across the remainder by early September. 

However, given that the survey week for the monthly jobs reports take place over the period including the 12th, Friday’s print will not include any major impact from states having withdrawn federal enhanced unemployment benefits early. That phase-out period started as early as June 12 for four states. However, by the July jobs report, more than two dozen states will have partially or fully removed these benefits, potentially impacting the jobs data going forward. 

At the same time, a too-strong June payrolls report could trigger a separate set of concerns for investors. The Federal Reserve, with its dual mandate to achieve maximum employment and price stability, has leaned on the ongoing weakness in the labor market as justification for keeping its crisis-era monetary policy support systems in place, especially as signs of fast-rising inflation have emerged. A strong June jobs report could undercut the Fed’s latest decision to keep policy unchanged, and potentially prompt a stronger or sooner than expected move to taper their pandemic-era asset purchase program.  

“For the first time in years, I’m actually worried about a too hot number causing some kind of volatility or pullback in stocks. That’s because the Fed has signaled they are looking to taper QE,” Tom Essaye, Sevens Report Research founder, told Yahoo Finance. “And if we get a really, really strong jobs number and a hot wage number, then markets are going to start to say gee, are they going to taper QE maybe before November, or are they going to taper it more intensely than we thought and in a market that’s frankly been very calm and a little bit complacent, that could cause volatility.” 

This post will be updated with the results of the June jobs report Friday morning at 8:30 a.m. ET. Check back for updates.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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