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Hiring was expected to have been strong in July, but wages probably rose just modestly as inflation remains stubbornly low.
The July employment report, released at 8:30 a.m. ET Friday, is expected to show the creation of 183,000 jobs, down from June's surprisingly high 222,000. Unemployment is expected to tick slightly lower to 4.3 percent from 4.4 percent, and wages are expected to rise by 0.3 percent, according to Thomson Reuters.
The market and Fed watchers are most focused on the average hourly wages. Since peaking in December at a 2.9 percent annual pace, the gains have dwindled. With inflation weak by other measures, the lack of wage gains in a tight labor market has been a concern.
"A downside surprise on wages would probably further reduce market-implied probability of a rate hike by December — currently 42 percent — as it would increase concerns that not only is price growth weak but wage growth is also pulling back," noted Citigroup economists.
The Federal Reserve's dual mandate on employment and inflation has been met on one side, by the relatively tight labor market, but inflation has lagged. The PCE deflator, the Fed's preferred inflation measure, showed inflation rising at just 1.4 percent in June, well below the Fed's target of 2 percent.
"They wanted a warming trend, they're getting a cooling trend," said Diane Swonk, CEO of DS Economics.
Wages is one place markets have been looking for early signs of wage inflation, but there has been no pickup. The wage number could impact markets if there is a surprise, but the Fed is not expected to change course based on July data, she said.
The Fed is still expected to begin paring back its balance sheet in September and will look for several more months of inflation and jobs data ahead of its expected interest-rate increase in December.
Job gains should be fairly broad for July. The service sector is expected to be an area of strength.
"Leisure is one of the drivers," said Swonk. "We expect to see leisure and hospitality to be running strong. It's been a strong sector. Healthcare, although it's been a leading sector, has abated in its pace." Swonk said some uncertainty around the health-care bill may have curbed hiring.
Some of the areas where gains came in June's strong jobs report may see less activity in July.
"Did construction have another big month? That belies the residential construction data. State and local payrolls rose quite a bit last month, and I wonder if that persists. Retail is a sector where we're going to continue to see decline," said Michael Gapen, chief U.S. economist at Barclays. He expects job growth of 175,000 and average hourly wage gains of 0.3 percent or 2.4 percent annually.
In retail, while there was a slight gain last month, there could be a decline as more brick-and-mortar stores scale back because of consumers moving online. Swonk said retail pay is one factor affecting wage growth, as it has declined as fewer commissions are paid at stores.
Jobs are being added in warehousing, as retail moves to e-commerce. Amazon, for instance, held a job fair for 50,000 workers and reported interest from 20,000 Wednesday.
"They pay better and have benefits, but it's still not a return to the $50,000, $60,0000 or $70,000 jobs that were lost in manufacturing, nor is it the volume," said Swonk.
Gapen said e-commerce adds one job for every three lost in retail.