Market Insider

June Jobs Report Could Put the Fed in Play

The slow-growing U.S. economy is expected to have created just about 100,000 jobs in June, better than the prior month but still too weak a trend to make a dent in unemployment.

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Fearful about the economy, Europe, the "fiscal cliff," and higher energy costs, employers across a wide variety of industries were expected to have seen little reason to invest in new employees last month.

When reported a month ago, May’s 69,000 nonfarm payrolls shocked financial markets, which were looking for 150,000 new jobs. Economists’ forecasts for June have been tepid, and are running lower than trader whisper numbers of 110,000 to 125,000.

May’s dismal jobs report prompted immediate speculation of further easing by the Federal Reserve, and even though the Fed extended one program at its June meeting, the market is still looking for signs that it could do a third, larger scale “quantitative easing,” or  QE3 asset purchase program.

The Thomson Reuters survey shows a consensus of 90,000 nonfarm payrolls, though some raised their estimates in the past few days. The consensus from the Dow Jonessurvey of economists was bumped up to 100,000 from 95,000 for payrolls; the unemployment rate is expected to remainunchanged at 8.2 percent.

“I think the whisper is closer to 110,000, 120,000," said John Briggs, senior Treasury strategist at RBS. "Anything between 80,000 and 130,000 doesn’t matter. It shouldn’t be a major market mover,”  he said. However, Briggs said the equity market is being supported by the idea of Fed easing and a really good number might actually be a negative to some in risk markets.

If the number is better than expected, “I don’t think that would take QE off the table. It would just have us waiting for the July 17 testimony” of Fed Chairman Ben Bernanke before Congress, he said. The Fed, at its June meeting, extended Operation Twist for six months. Under that program, the Fed buys longer duration Treasurys and sells the same amount of shorter-term securities in an effort to hold rates low, and unlike QE, it does not expand the Fed balance sheet.

Goldman Sachs economist Andrew Tilton said the Fed will act if it needs to, but it’s unlikely to move as soon as some traders expect. “The Fed did just take a meaningful action through the extension of Twist. I think they hope it carries them through the election without the need to do more,” he said. Tilton said he expects that if the Fed does not see an improvement in employment by next year, it could act again, and it could act sooner, if there is a serious deceleration.

Traders became slightly more optimistic about the June employment report Thursday after ADP ADP reported an increase of 176,000 private payrolls, above the 108,000 expected, and even though it is not considered a reliable barometer. Jobless claims Thursday, while not relevant to the June employment report, were also better than expected, at 374,000, compared to estimates of 385,000.  Employers also cut the fewest number of workers in a year in June, according to a report from Challenger, Gray and Christmas.

Goldman economists Thursday changed their original 75,000 payrolls estimate to 125,000. Tilton said they saw a number of reasons for a better number, including recent data such as the employment components of the ISM surveys, and a pickup in job advertisements.

He said he believes employers are holding off hiring for a number of reasons including the uncertainty around Europe and the U.S. fiscal cliff, which is the term used for the year end collision of expiring tax breaks and higher budget cuts. Economists expect the U.S. economy to take a serious hit in 2013 if Congress does not take action to extend tax cuts and fine tune spending reductions.

“Growth has been low and there remains uncertainty about  the economy and policy here and abroad. All of those things are weighing on activity but overall, I’d put it on low growth in the U.S.,” he said.

Tilton said one area where there could be job growth is in construction, paralleling the recent improvement in housing data.

Barclays chief U.S. economist Dean Maki expects to see 75,000 jobs were added in June. “We think the European weakness has increased concerns U.S. firms and made them less willing to hire. It’s not so much the recession but the worry that something significantly worse is going to happen,” said Maki.

Maki pointed to the June ISM manufacturing survey, which showed a drop in exports. “I think this was a result of the recession in Europe,” he said, noting multinationals are sensitive to that trend. He also said European recessions in the 1990s resulted in lower energy costs, and that could be the case this time. Gasoline prices, at a national average of $3.338, are already about 24 cents off month ago levels, according to AAA.

“We think consumer-spending growth in the second half will be 2.5 percent because of that boost from falling energy prices, assuming there’s no geopolitical event that causes a surge in energy prices,” said Maki.

Follow Patti Domm on Twitter: @pattidomm

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