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While the pace of job growth probably remained strong in June, the upcoming employment report could underscore why the Federal Reserve might need to keep its rate hikes modest this year.

Most economists believe nonfarm payrolls rose by 250,000 in June, although forecasts range from 160,000 to 310,000, according to a


survey. The unemployment rate is expected to hold steady at 5.6% due to an expansion in the labor force.


the manufacturing

sector is hiring and the service sector is growing," said Peter Kretzmer, senior economist at Banc of America. Payrolls increased by 248,000 in May, with the service-providing industry accounting for 176,000 new jobs. Factory employment increased by 32,000, its biggest gain in almost six years.

Over the past nine months, the economy has recouped more than half of the jobs lost during the previous three years. From March 2001 through August 2003, some 2.7 million jobs had been shed, according to the government's payroll survey. But 1.4 million jobs have been created since August, with 947,000 coming in the last three months alone.

Still, Banc of America strategist Tom McManus thinks there's little reason to celebrate.

"Jobs have been climbing now for nine months, but the recovery is anything but robust," he said. "The expected growth for June is only 250,000, in line with the long-term trend

but not enough to begin closing the 'jobs gap.'"

Since 1939, McManus said, growth in nonfarm jobs has compounded at almost 2.2% per year. If the labor market had followed this historical pattern over the past three years, instead of diverging, total employment would be higher today by about 12 million, he said.

Other data show that the job market has a long way to go before it can return to levels seen just a few years ago.

The Bureau of Labor Statistics' employment-to-population ratio, which measures the proportion of the population aged 16 and over with jobs, stood at 63% in November 2001, when the recession officially ended. Today, it's at 62.2%.

If 63% of the working-age population had jobs now, there would be 1.8 million more Americans employed. If 64.7% of the population were working, as was the case in April 2000, there would be 5.6 million more Americans employed today. The working-age population stood at almost 223 million in May, according to the BLS.

Ethan Harris, senior economist at Lehman Brothers, thinks 1.5 million to 2 million more jobs need to be created to return the economy to full employment.

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"At the pace we're going now, we're running at about 100,000 a month above the growth in the labor force," he said. "That means it takes us between 15 months and 20 months to get to full employment. So you've got a ways to go."

Harris predicts that 275,000 news jobs were created in June and he thinks the jobless rate ticked down to 5.5%.

Employment indicators have been mixed over the past few weeks. Weekly jobless claims increased 13,000 to 349,000 in the week ended June 19 and the four-week moving average of claims rose 1,000 to 344,250. Meanwhile, the Chicago PMI's employment index fell to 53.6 in June from 54.8 in May.

Still, the Conference Board's consumer confidence index showed that the percentage of those saying jobs were hard to find, fell to 26.5% in June from 30.3% in May. Those saying jobs were plentiful rose to 18% from 16.6%. "The perception that employment conditions are improving ... points to a good employment report on Friday," said BMO Nesbitt Burns economist Sherry Cooper.

A survey by Business Roundtable in June found that 81% of American chief executives expect employment to increase or stay the same over the next six months -- compared to 58% last year. Business Roundtable is an association of CEOs at major U.S. companies.

Although the labor market has begun to show signs of life this year, some economists say that many of the new jobs created are less well paid than the jobs that have been shed.

Since the recession ended in November 2001, service jobs have risen by 1.653 million while goods-producing employment has fallen by 1.3 million, according to Anthony Chan, chief economist at Banc One Investment Advisors. Average hourly earnings for goods producing employees now equal 109.5% of the national average but wages for service-providing workers currently stand at 97.4%, he said.

Some pundits also note that when the Fed raised rates in the early 1980s and 1990s, the job market was in better shape than it is today.

"I think it's fair to say there was a longer, more established period of payroll growth

back then because we didn't have as soft a period" in previous years, said Kretzmer.

A pickup in job growth can send wages higher, which can contribute to overall inflation. But Kretzmer said workers' salaries are likely to remain subdued this year. Average hourly earnings are projected to climb 0.3% in June, in line with May's increase. "There's certainly some level of slack in the labor market," he said.

After so many months of job losses, it's not surprising that investors have reacted strongly to job gains this year, but McManus said it's important to put the numbers in perspective.

"Right now, the trend growth is 250,000 a month, recovery growth would be something higher," he said. "If we are correct, the Fed will tighten slower than the market currently anticipates."

Some analysts dispute that the labor market will take a long time to recover. John Silvia, chief economist at Wachovia Securities, is looking for payroll gains of between 275,000 and 375,000 per month for the rest of the year. "I think there's a lot more labor shortage out there than people think," he said.

Silvia believes the jobless rate will fall to 5% by year end, which he considers full employment. Still, he is looking for the fed funds rate to climb by just 75 basis points this year, below current expectations for 125 basis points of tightening. "Wages are rising

but I don't think it's a reason to be overly concerned" about inflation, he said.

On Wednesday, the Fed raised its benchmark fed funds lending rate by 25 basis points to 1.25%. While noting some price pressures in recent data, the central bank said part of the stimulus was "transitory" and left in its pledge to tighten at a "measured" pace.