US Non-Farm Payrolls More Likely to Disappoint than Satisfy

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U.S. non-farm payrolls are always the single most important data release in the economic calendar, but with global markets in thrall to the Federal Reserve's plans to slow its asset purchases, Friday's release has all the more reason to grab center stage.

The consensus forecast is for a solid increase of 165,000 jobs in June after 175,000 in May. That would be broadly consistent – depending on other economic data – with the schedule for tapering off quantitative easing that Ben Bernanke, the Fed chairman, laid out at his recent press conference.

Recent economic reports have been mixed, however, making a disappointment somewhat more likely than a number well ahead of forecasts. Gennadiy Goldberg at TD Securities in New York expects the pace of employment growth to have dipped to 161,000.

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"Even though this will mark a small pullback from the performance in May, it will underscore the continued improvement in economic growth momentum," he said.

Goldman Sachs is more pessimistic. Jan Hatzius, chief economist at the investment bank in New York, wrote in his preview: "We expect a fairly lacklustre employment report for June, with non-farm payroll growth of 150,000, similar to the average of the past three months."

According to Mr Bernanke, the scenario that would have the Fed slowing down its asset purchases from $85 billion-a-month this year would "involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters". Jobs growth of 165,000 fits that bill – but the question is whether the pace is slowing down or picking up.

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There is one thing that most forecasters see for June: a drop in the unemployment rate from 7.6 to 7.5 per cent. That is not a bold forecast because the actual figure was close to the dividing line in May. Joblessness need only fall by 10,000 for the rate to be rounded down rather than up.

Elsewhere, the economic data are not especially helpful in terms of figuring out what happened to the jobs market in June.

On one hand, several reports that relate directly to jobs came in fairly strong. Purchasing managers in the services sector – which has been the main source of jobs growth in 2013 – reported stronger hiring with an index of their employment activity rising strongly from a neutral 50.1 in May to 54.7 in June.

New claims for unemployment insurance last week dipped from 348,000 to 343,000 and the employment report compiled by ADP, a payroll processing company, said that private sector jobs rose by 188,000 in June.

All of that positive evidence on the health of the jobs market, however, is offset by signs of weak growth in the second quarter, as cuts to federal government spending under sequestration bite, and weak growth outside the US hits exports and the manufacturing sector.

Those effects are likely to be visible in Friday's jobs numbers. Goldman Sach's Mr Hatzius estimates the sequestration might lead to an overall drop in federal payrolls of 15,000-20,000 plus a small further hit in the private defense industry.

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Meanwhile, purchasing managers in the manufacturing sector were much less upbeat than their services counterparts, with an employment index down from 50.1 to 48.7. It would be no surprise if the factory sector were to have cut jobs in June as well.

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

Changes in job growth tend to lag behind changes in the overall economy. The consultancy Macroeconomic Advisers reckons that payrolls could get stuck at about 155,000 for the next few months – reflecting the slowdown to date this year – even as the worst of sequestration passes and the economy starts to pick up steam again.