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January Payroll Forecast Sees 160,000 New Jobs, Rising Wages

US employment growth is cooling amid uncertain trade conditions and the spreading coronavirus, but employers still likely added 160,000 workers to payrolls last month.

U.S. employers likely created 160,000 last month, according to analysts' forecast ahead of Friday's January employment report, but slowing growth and inconsistent wage increases suggest an uneven start to the year. 

The headline forecast for the January report suggests 160,000 net new jobs were created last month, a pace that showed modest improvement from the 145,000 tally in December but trails the 179,000 monthly average recorded over the whole of 2019. Data inside this week's ISM services sector activity survey, as well, showed hiring cooled for a second consecutive month amid trade war caution and the uncertainty linked to the spreading coronavirus in China, which has disrupted global supply chains and blunted investor sentiment.

A better-than-expected reading for weekly jobless claims, which fell by 15,000, and a modest reading of unit wage costs, which suggest little inflation pressure, could support a stronger January reading. ADP's private sector employment report, meanwhile, showed 291,000 new jobs added last month, the most since 2015.

The Labor Department will publish the January reading at 8:30 am Eastern time.

"Job growth clearly has slowed from its peak, but the sharp downturn in most of the forward-looking surveys—pointing to payroll growth of just 50,000 or so—has not been fully captured in the data," said Ian Shepherdson of Pantheon Economics. "We're assuming that employers over-estimated the impact of the intensification of the trade war on demand, but the persistence of soft survey data—and, especially, the renewed downturn of the ISM non-manufacturing employment index—is disconcerting."

"The longer the surveys remain weak, the greater is the risk that they are telling us something real about labor demand, which will hit the payroll numbers eventually," he added.

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Wage data, as ever, will be closely watched by Wall Street for any signs of potential inflation pressures, which could then translate into a fuller response from the Federal Reserve. 

Average hourly wages rose only 0.1% in December but are forecast to rebound to around 0.3%, a pace that would take the annual increase to 3%. A softer wage reading, however, alongside stronger-than-expected job additions could boost equity market gains as investors bet improving growth could come without upward price pressures and higher Fed interest rates.

In fact, BofA data published Friday suggest U.S. equity inflows topped $12.7 billion over the week ending February 5, the best in nearly two months, while the CME Group's FedWatch tool is currently pricing in no bets on a 2020 rate hike 

"Given the economy continues to create jobs in significant numbers and the fact that the unemployment rate is the lowest it’s been since the late 1960s, we would have thought wage growth should have picked up more than it has done. It peaked at 3.4% year on year last February, but as of December, was back down to just 2.9%," said ING's chief international economist James Knightley. 

"The Federal Reseve’s Beige Book continues to talk of extreme worker shortages in some industries so if companies are so desperate for staff with the right skill set why are they not paying more in the form of wage hikes?," he asked. 

Another factor to watch from today's release is the annual revision to previous data sets from the Bureau of Labor Statistics, which is forecasting a reduction of 501,000 jobs from the totals gathered between April 2018 and March 2019. 

"Although this revision will not necessarily change the monthly and annual changes in a meaningful way, it may well do so," said Brad McMillan, chief investment officer at Commonwealth Financial Network. "One of the more likely scenarios is that last year's job growth will be revised downward significantly, and the recent pickup will be shown to be even stronger. This scenario would not change the story, but it would provide more context."