US: Nonfarm payrolls still below pre-pandemic level

Employment data carries too much weight for Fed policy. The data that will give direction will be the employment and wage data for May, which will be announced tomorrow. Non-farm employment is expected to increase by 325K. It is estimated that the unemployment rate will decrease to 3.5% and the participation rate will increase to 62.3%. Average hourly earnings are expected to increase by 0.3% monthly and 5.2% annually.

Nonfarm payroll growth is likely to lose some momentum in May, as demand slows in some of the economy’s most interest rate-sensitive sectors (housing, construction). This would be consistent with the levels seen in initial jobless claims in recent weeks. A continued rotation in consumer demand from goods to services will likely also reduce the need for work in industries such as transport and warehousing. However, with rapid wage growth and nearly two job opportunities for every unemployed, non-farm employment will continue to expand and will likely return to pre-pandemic levels by the end of the year.

Meanwhile, the level of vacancies is still very high as yesterday’s JOLTS data showed. Labor demand is still high, but the current labor supply appears to be insufficient to fill the gaps. On the other hand, the salary factor is very important in job changes. For this reason, high wages have to be paid in order to attract qualified personnel in this period of high labor demand. Wages will continue to gain momentum, given the high demand for wage increases due to inflation.

As a result; companies are still recruiting. Markets have also begun to take into account that the Fed will pause rate hikes in September, but it is quite possible that it will continue to tighten at the slow pace after a third 50 bps in September. What will determine this will be how the risk of a recession will develop in 2023. The Fed would have to wait for the inflation rigidity to dissipate to be dovish, and in the process, it may allow unemployment to rise a bit while raising interest rates. If employment does not deteriorate, the economy can bear higher interest rates.

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Hibya Haber Ajansı