Market Insider

June jobs report expected to be strong

The odd jobs report

June's jobs report could show that 2015 will be the best summer for hiring since before the financial crisis.

"There's a lot of jobs being created across a lot of industries and in all regions of the country, and the labor market is a lot tighter. We're getting bigger pay increases. It's the best summer job market since the financial crisis, since 2007, and in some respects it's better because the job creation is stronger and broader based," said Moody's Analytics chief economist, Mark Zandi. "Back in 2007, it was more focused on housing, housing related and Wall Street. This feels much deeper. It's everything but the energy sector."

This trend already started to show up in other reports, but should be more apparent in June's employment data when it is released Thursday at 8:30 a.m. ET. New faces are expected to have joined the ranks of workers in engineering offices, accounting firms, restaurants, construction sites and even at manufacturers.

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Economists expect 230,000 nonfarm payrolls were added in June, and that the unemployment rate fell to 5.4 percent from 5.5 percent, according to Thomson Reuters. Average hourly earnings are expected to rise by 0.2 percent following a surprise 0.3 percent gain in May.

Zandi expects to see 250,000 nonfarm payrolls, and he expects average hourly wages to rise by 0.3 percent, or 2.3 percent year over year.

"This summer is about hiring the millennials, and they're doing better. There's a lot of switching jobs at a much higher rate, than there were a year or two ago. And when they switch, they're getting much larger pay increases," said Zandi.

The wage component is key, since economists say that the most important missing pieces of data the Fed would like to see improve are wages and inflation.

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"They're looking directionally at this point, not the actual rate of growth, as long as they feel comfortable that wage growth is accelerating. Given the tightening of the labor market, I think that's enough for them," he said of the Fed.

William Lee, head of North American economics at Citigroup, said while hiring is the best it's been in years, it's still disappointing since companies are leaving jobs open for an unusually long time before adding workers.

"That's one of the things that people don't take into account. Even though vacancy rates are extraordinarily high, it means companies are shopping around. The ratio for hiring to job openings is the lowest it's ever been," he said. "Companies are shopping for better people to fill their ranks. They're not pulling the trigger as quickly as they were."

Lee said the factors that may be driving that trend are a mismatch in skills between workers and employers' needs; a slow-growing economy means companies are not rushed, and the move by companies to hire more part-time or temporary workers, versus full-time. For Lee, this explains what he sees as a slow move in wage growth.

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Nonetheless, economists are encouraged. Diane Swonk, chief economist at Mesirow Financial, said there could be a jump in teen hirings and there's been definite improvement in the hiring of college graduates in business. The unemployment rate among teens age 16 to 19 was 17.9 percent in May, but the number of individuals actually looking for jobs is also higher.

Summer jobs should be more abundant this year though that hiring does not show up in nonfarm payrolls as the number is seasonally adjusted.

"You really want to watch the young people because they really got pushed out.... You really get the sense that we're starting to hit a critical mass. It shows up in consumer confidence. We're at very high levels of confidence, and you really wouldn't see that unless the consumer was really doing a little better," she said. "There's something going on. You can feel it. It's uneven and we get these little hiccups…. But we're doing better."

There were 280,000 nonfarm payrolls added in May, and the biggest areas for hiring were the 63,000 business and professional jobs, and leisure and hospitality, at 57,000.

"This is the summer that it looks like we finally get some summer vacations and people who were waiting to exhale, are exhaling. It's better for summer hires. The anecdotes for new grads are looking good," said Swonk. "You can feel it. You can see it. You can see a few younger faces working, and that's always good news."

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Pierpont Amherst chief economist Stephen Stanley said he expects average hourly wages to pick up, and wages have already been showing signs of gains. "Average hourly earnings was up in the last report. Just as important, we've seen steady acceleration in ECI (the employment cost index) numbers. The hourly compensation number in the productivity release, those have picked up. Just looking at anecdotal and survey-type measures, those have been showing wage firmness for a long time. The average hourly numbers are really the last shoe to drop," he said. "The fact we got 0.3 in May leads the way, and if we get another 0.3 percent in June, that will raise a few eyebrows.

Stanley said the income numbers suggest the households are doing better and have the ability to spend. He expects to see 225,000 nonfarm payrolls added in June.

"I'm guessing you might see more of an influx into the labor force in June than typical. It's the best job market we've seen in the cycle quite easily," he said. The summer jobs market should also be stronger, he said. "That's not saying a whole lot. We've had some awfully weak ones. The signs are that the labor markets are moving into outright tightness. If you're looking for a job, it should be considerably easier than it's been in past summers."

While hiring is picking up, several economist say the job growth pace should stay about the same, 225,000 to 250,000, since so many jobs have been added in the recovery already.

"That would be double the rate needed to absorb the growth in the working age populations so that means unemployment should continue to decline," Zandi said. That will also make the U6 unemployment rate decline. U6 has gradually fallen to 10.8 percent, but it is still well above the official unemployment rate. It represents the total unemployed including people marginally in the workforce and those who work part time for economic reasons.

Economists say the structure of the labor market has also changed, with companies relying on more temporary and part-time workers.

"Hiring is getting better, but at a much lower pace than the openings. The labor market is a mixed story. The top line numbers look great. We're dropping to 5.4 percent unemployment and we're going to see some nice employment growth, but slack absorption is a different story. Given the slow rate of hires relative to vacancies, it's not enough," said Lee.

He said partly to blame is the redistribution of wealth but also consumer behavior has changed, with less emphasis on consumption and more on saving. He said some of the wage increases may have been companies getting ahead of mandatory increases in minimum wages.

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But economists are united in expecting the improvement to continue, and the June report may be one more piece of evidence of the economic spark the Fed needs to see, before raising interest rates off of zero for the first time since 2008.

Besides Thursday's employment report, there are weekly jobless claims at 8:30 a.m. and factory orders for May at 10 a.m.