June Jobs Report Preview: Cooling Labor Market Trends May Further Bolster Rate Cut Hopes

Author: Piero Cingari | July 03, 2024 11:56am

The U.S. labor market doesn’t appear as tight and hot as a couple of months ago, with the June’s Employment Situation report likely to show an overall cooling trend from a very strong performance in May.

Slated for release Friday at 8:30 a.m. ET, the official jobs report from the Bureau of Labor Statistics is expected to reveal a decline in nonfarm payroll growth and a slowdown in earnings momentum.

On Tuesday, Fed Chair Jerome Powell suggested the labor market is “cooling off appropriately,” and the Fed will monitor these developments, ready to act if conditions warrant.

June Jobs Report Estimates: What Economists Expect

Economists predict a decline in the pace of monthly new nonfarm payrolls from 272,000 in May to 189,000 in June. Estimates range from 150,000 to 237,000, according to Econoday.
The unemployment rate is expected to hold steady at 4%.
Average hourly earnings are anticipated to rise at a 0.3% month-over-month pace, a deceleration from May’s 0.4%.
On an annual basis, pay growth is projected to decline from 4.1% to 3.9%.

Conflicting Data Points To Potential Surprises

Recent economic data have been mixed, suggesting potential surprises in the June jobs report compared to economists’ expectations.

The ADP’s National Employment Report, which uses payroll data from Automatic Data Processing Inc. (NYSE:ADP) and focuses on private employment, revealed 150,000 job additions in June, below May’s 157,000 and the forecasted 160,000. Pay growth slowed, with job stayers reporting a 4.9% year-on-year increase.

Nela Richardson, chief economist at ADP, stated that job growth was solid but “not broad-based,” noting that June’s numbers would have been disappointing without a rebound in leisure and hospitality hiring.

Bill Adams, chief economist for Comerica Bank, highlighted that private job growth was cool in June according to ADP and the government jobs report is also expected to show the least pay growth since 2021.

Comerica forecasts nonfarm payroll employment to increase by 220,000 in June, with the unemployment rate edging up to 4.1% from 4.0%.

Adams also noted the ADP data don’t capture the significant rise in self-employment due to gig work and entrepreneurship, which are growing faster than in the pre-pandemic period.

Overall, the ADP and jobless claims reports reinforce the impression that the labor market has cooled and is likely to cool further in the second half of 2024.

Services Sector Jitters

The most conflicting indications ahead of Friday’s jobs report came from services sector surveys by S&P Global and the Institute for Supply Management (ISM).

S&P Global’s Services Purchasing Managers’ Index (PMI) for June showed the strongest expansion for U.S. services activity since April 2022, extending the growth streak to 17 consecutive months. In contrast, the ISM Services PMI reported the worst contraction in over four years last month.

Employment conditions also sharply differed in the two surveys. S&P Global’s Services PMI indicated employment returned to growth after two months of contraction, while the ISM reported a faster pace of contraction in the services labor market.

"U.S. service sector companies reported an encouragingly solid end to the second quarter, with output rising at the fastest rate in over two years. Both new order inflows and hiring have accelerated, the latter buoyed by firms taking on more workers in response to rising backlogs of work,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said.

Steve Miller, chair of the ISM Services Business Survey Committee, commented, "The decrease in the composite index in June is a result of notably lower business activity, a contraction in new orders for the second time since May 2020, and continued contraction in employment.”

Weaker Jobs Data May Fuel Rate Cut Wagers

On Thursday, market reactions highlighted the significance investors placed on the ISM Services PMI. Treasury yields plummeted by 8 to 9 basis points on the long end as traders increased bets on Fed rate cuts.

The probability of a rate cut in September climbed from 65% to 73% following the release, with 52 basis points of cuts already anticipated by the end of the year.

Bonds rallied, with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) soaring 1.4%, while the U.S. dollar weakened substantially, down 0.5%.

Lower yields and the weaker greenback aided gold prices, with the precious metal, as tracked by the SPDR Gold Trust (NYSE:GLD), up 1.4%, eyeing its best-performing session since mid-May.

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