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Mayday, Mayday! Look for May Jobs Report to Confirm Tightening Tack

Economists will be looking at the average hourly earnings number.

Tomorrow brings the May employment report. The financial markets have been hot for this release since April's frightening

consumer price index

put them on

Fed

watch. The markets want to know: Will this report alone give the FOMC a reason to boost rates at its June 29-30 meeting?

Cautious economists say probably not, but that a strong report will inevitably push policymakers toward a widely expected tightening.

"It's not in and of itself going to be strong enough to get the Fed to tighten, but this and another CPI increase, and the Fed could go," says Mike Moran, chief economist at

Daiwa Securities

, who's looking for nonfarm payrolls to add 225,000 jobs.

The consensus among economists surveyed by

Reuters

calls for the addition of 216,000 nonfarm jobs, and for the household unemployment rate to hold steady at 4.3%. That's simply more of the same: The payroll increase would be slightly weaker than the 12-month moving average of 223,000.

Average hourly earnings, which will hint at whether economic strength has created wage pressures, promise to be the key to this report. The consensus has average hourly earnings rising 0.3%, which would push the year-over-year rate of increase up to 3.3%. That's still low compared with April of last year, when wages were rising at a 4.4% clip.

"If average hourly earnings are too strong, the Fed may act because of this intoxicating punch," says Rich Yamarone, senior economist at

Argus Research

, who's expecting a 0.2% rise in hourly earnings and 275,000 new nonfarm jobs. "I think that's the key thing.

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But if we get really benign average hourly earnings and 275,000, I don't think there's a story."

Aside from a big increase in average hourly earnings or a payroll surprise on the order of 400,000 jobs, economists expect this release to simply provide more evidence that labor markets are tight. In other words, it's not going to scare the heck out of anybody like April's surprise 0.7% jump in the CPI. The report is likely to play into the Fed's worries of labor markets so tight they will inevitably cause wage pressures. But is it enough to get the Fed to act?

"That depends where you think they are right now," says Mike Niemira, economist at

Bank of Tokyo-Mitsubishi

. "When you put everything together, the Fed is more likely to move rates up at the next meeting." Niemira is expecting payrolls to add 220,000 nonfarm jobs and the unemployment rate to slip to 4.1%.

Brian Fabbri, chief economist at

Paribas Capital Markets

, also considers Friday's report just another witness for the prosecution, rather than the smoking gun. He's forecasting an increase of 230,000 nonfarm jobs and "perhaps" a slight drop in the unemployment rate to 4.2%. Barring an outlying figure, he expects the Fed to take the gradual approach and tighten in August.

"While it's not telling us anything different -- that the economy is strong and labor markets are tight -- to me, that's worrisome," he says. But the report "will leave the Fed in a position where they will assess all the pieces of information, rather than saying employment is key."

Fabbri also believes that manufacturing employment will come in flat this month, which would mark its first nondecline since March of last year. (This excludes September, when striking

General Motors

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workers returned to the assembly lines.)

Spurring this debate is the steady rise in the

National Association of Purchasing Management's

index of manufacturing sentiment. This measure has risen for the past five months, and for the past four the index has read above 50, indicating expansion in manufacturing. But employment hasn't yet recovered: The employment component of the index last month rose above 50 for the first time since May of last year.

Were manufacturing employment to expand this month, it would be one more nail in the slowdown coffin. And one more reason to think a tightening is at hand.