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Friday's jobs report could be a disappointment

A help wanted sign in the window of the Unika store in Miami, Florida.
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A help wanted sign in the window of the Unika store in Miami, Florida.

Economists currently expect to see that 180,000 jobs were added to nonfarm payrolls in July, according to a consensus estimate from Thomson Reuters. But I would not be surprised to see a 'miss' when numbers are reported on Friday. The evidence is clear that the job growth slowdown this year is the beginning of a trend, and not an anomaly.

While there was plenty of excitement over the June payroll report that saw job gains of 287,000, it only brought the three month average to 147,000 which compares with the six month average of 172,000 and an obvious slowdown from the 229,000 average seen in 2015 and 251,000 in 2014.

The moderation in the pace of job gains reflects two very important factors. First, this is typical of late economic cycle behavior. We are approaching year eight of this expansion and it is becoming more and more difficult to find qualified warm bodies to fill job openings. With the participation rate hovering around the lowest level since 1977, the challenge is ever more acute.

This supply side constraint on the labor market is also a key reason why economic growth has not been able to break out above of its 2-2.5 percent growth rate.

The second reason that we're seeing a hiring slowdown is the dramatic shift over the past five quarters in the direction of corporate profits and margins. Granted, energy firms have been the main factor in dragging profits lower in the aggregate but we're seeing a profit slowdown in many other industries as well, to the point where earnings are now falling even excluding energy.

"We are late in this economic cycle and we are seeing all the classic signs of a recovery that is getting tired."

In terms of profit margins, labor is now getting a bigger share of the corporate profit pie off levels that haven't been seen since right after World War II. Thus, a more cloudy earnings picture is potentially leading to a moderation in the level of job gains. After all, a more challenging earnings outlook doesn't lend itself to an increase in hiring. The shrinkage seen in the last job openings report may be a sign that demand for labor is cooling.

This all said, job gains of 100,000-150,000 may still be enough to either maintain or modestly lower further the unemployment rate as the number of entrants into the labor force continues to slow as well. Therefore, tightness in the labor market could be seen even in the face of modest job hiring in some areas.

Other key components of tomorrow's release will be the wage data, where month after month we've been hoping for the long awaited acceleration in wages, and productivity data. The estimate for average hourly earnings is up 2.6 percent year over year, which would match the best level since 2009 but is below the 3 percent+ range pre-crisis.

The next batch of productivity data will be seen next week for the second quarter and the trend has been really poor. Over the past four quarters, productivity has only averaged 0.7 percent growth which is less than half the 25 year average of 2 percent. Some may argue that this data is not best capturing the productivity enhancements of modern technology but there are real drags anyway on the trend. A sharp rise in regulation and complying with it is a major drag on productivity.

A slowdown in the pace of new job creation is also a factor in productivity, as it results in a lower pace of economic dynamism. Additionally, a general nervousness on the part of many Americans about their financial fate makes them reluctant to quit their jobs and leaves them stuck in work they are not necessarily best suited for and therefore not as productive in.

Bottom line, while the level of firing's as seen in weekly jobless claims remain modest, I expect the pace of hiring to continue to slow. We are late in this economic cycle and we are seeing all the classic signs of a recovery that is getting tired.

Commentary by Peter Boockvar, the chief market analyst for the Lindsey Group and co-chief investment officer at Bookmark Advisors. Follow him on Twitter @pboockvar.

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