Hiring Improves Slowly, Jobs Number Seen Moderate

A welder builds parts for finished petroleum tanks at Southern Tank and Manufacturing Inc. in Owensboro, Kentucky, U.S.
Ty Wright | Bloomberg | Getty Images
A welder builds parts for finished petroleum tanks at Southern Tank and Manufacturing Inc. in Owensboro, Kentucky, U.S.

Job growth in June is expected to be much like the moderate pace of May, and it's unlikely to become much more robust for some months to come.

Economists expect to see 165,000 nonfarm payrolls added in June, down slightly from the 175,000 added in May, according to Reuters. The report, when released at 8:30 a.m. ET Friday morning, is also expected to show unemployment at 7.5 percent, a drop of 0.1 percent.

While hiring has improved and there are clear signs of health in housing and the auto sector, employers are still holding back.

"If CEOs see and have confidence that this job growth, kind of moderate as it may be, is sustained, I think you'll see them taking some chances," said Deloitte CFO Frank Friedman. "If this is sporadic, and you have high months, low months, interruptions, I think it will be more difficult for them to get back. The worst thing is...they don't want to get ahead of where the economy is."

ADP's private sector employment report Wednesday said 188,000 jobs were added in June, slightly better than the 160,000 expected by economists, and it was also higher than the 134,000 added in May. While encouraging, it is still far from the robust growth of 200,000 plus jobs needed to bring down unemployment in a significant way.

"We're still going to see (jobs added in) leisure and hospitality and food service," said Diane Swonk, chief economist at Mesirow Financial. "I think manufacturing will be weak, but we could see some marginal increases in construction. Some of it is weather. It's been an unusually rainy and hot month which screws things up at both ends of the spectrum. I don't think you can underestimate some of the seasonally adjusted data that doesn't expect to have rainy days the entire month of June."

(Read More: Private Jobs Jump, Claims Fall as Labor Market Heals)

Mark Zandi, chief economist at Moody's Analytics, said he expects to see 175,000 payrolls for June, but he does not see a change in the pace of job growth until the end of the year. "175,000 is what we've been getting. We got it last month. We got it last year. We've gotten it in the past two years. In my mind, the job market hasn't changed much," said Zandi. And it won't change "not for the next six months or so because the fiscal headwinds are blowing very hard. You actually see that in the GDP numbers."

Zandi said second-quarter GDP is currently tracking at 1.2 percent. "Usually employment growth lags GDP growth by a quarter or two, so that signals 175,000 through the remainder of the year, and it may even take a step back. I don't think it's until late this year into next year where the fiscal headwinds fade and the job market would improve," Zandi said.

But the rate of job growth appears strong enough to encourage the Federal Reserve to pare back its quantitative easing program. The Fed has said it could cut back on the $85 billion in monthly bond purchases before the end of the year if the economy shows improvement, and it expects to end the purchases by the middle of next year, at a time when it expects the unemployment rate would be about 7 percent .

Just talk of the wind down of its Treasury and mortgage purchases unsettled markets and sent interest rates higher, including mortgage rates, even though Fed officials say the markets have overreacted and they have no plans to raise short-term interest rates any time soon. So that makes the number an even more critical event for markets than usual, and the market's hypersensitivity makes the Fed's balancing act of winding down its programs all the more difficult.

Mortgage rates have risen quickly and dramatically, with the 30-year fixed conforming loan at about 4.29 percent, off last week's high of 4.46 percent, but still well above month ago levels.

Zandi said if rates rise too much, it could threaten housing, a cornerstone of the recovery. "The key is if interest rates were to move higher before the jobs recovery," he said. "If this is it, and (the 10-year yield) can kind of hang around 2.5, we can digest it." The 10-year Treasury yield rose as high as 2.66 percent after the Fed's last meeting, but has been holding just under 2.5 percent since last week.

(Read More: Service Sector Growth Slows to 3-Year Low)

Economists are divided on the outlook for the second half, with some economists seeing growth accelerating and others seeing it closer to a sluggish two percent. The difference of opinion in part is the result of differing views on how much federal budget cuts have already affected the economy.

Swonk, like Zandi, sees more impact to come from the sequester, or automatic budget cuts that sliced across the government, and particularly hit defense. Swonk expects to see 145,000 total nonfarm payrolls for June, including a drop of 10,000 in public sector jobs.

"We do think we have some animal spirits out there. That's the good news, but we still haven't been able to temper the headwinds," she said.

Deutsche Bank chief economist Joseph LaVorgna also expects 145,000 payrolls, but he sees the jobs picture changing in the not too distant future. "History says we're going to have some payroll volatility soon," he said, adding he expects it to be to the upside. LaVorgna is in a camp of Wall Street economists who expect to see growth accelerate in the second half of the year to 3 percent or better, after the first half's sub-2 percent growth rate.

LaVorgna said the economy adjusted to this year's higher taxes and spending cuts, and he believes there will be "a watering down" of the sequester by Congress when it works on the 2014 budget. "That fiscal drag, I don't believe will be as potent come August/September," he said.

As for jobs, one positive is the decline in jobless claims, which fell to 343,000 this week. Lower claims, consistently below 350,000 in the second quarter, are signaling confidence that the job situation is improving and if the trend continues into the next quarter, the pace of job growth should pick up, he said.

Deloitte's Friedman said business confidence is picking up and that ultimately translates to jobs. Deloitte interacts with major corporations daily in its audit, tax and consulting businesses.

"Companies are clearly more confident than they were last quarter and the quarter preceding, and I think that's going to help. I did see in the last jobs report, the number of temporary employees picked up and that's usually a good sign for employment down the road," Friedman said. "What we're seeing is cautious optimism. They don't want to be put in the same position they were put in a few years ago.

"I think that this year's quickly passing. I think next year they'll be more bullish than they were this year. They're more bullish than they were six months ago. I think it seems to be evolving at a measured pace," said Friedman, who said his own company added about 8 percent to its workforce this year. Deloitte

Friedman said companies made up for not hiring with increased productivity, which goes straight to the bottom line.

"There's a part of every company that has certain core beliefs and a certain culture and a lot of that revolves around their people…You want to have good morale. One way to hurt that is to hire people just to lay them off. Nobody wants to be put in that position," he said.

—By Patti Domm, CNBC