As a group, economists are looking for 900,000 new jobs, up from 850,000 last month; for the unemployment rate to drop from 5.9 percent to 5.7 percent; and for wage growth to rise by 0.3 percent for the month and 3.9 percent (up from 3.6 percent) for the year. In short, after a very strong June, the expectation is that hiring has accelerated even further. If so, this will be a very strong report and will signal that the expansion continues unabated.
Unfortunately, that outlook looks likely to be too optimistic. The major reason is the sudden resurgence of the pandemic, with the Delta variant taking case growth to five times the level at the end of June. The ADP employment report, which came out this morning, suggests that job growth may have slowed significantly in response to that medical news. It revealed 330,000 new jobs, less than half the expected 695,000. If we see a similar shortfall in the official report, it would signal that the job recovery has slowed, at a minimum.
Beyond the rising medical risks, the job market also faces the question of whether the labor shortage is starting to get better. Medical risks make workers less likely to move back into the labor force, which is a headwind. But there were expectations that the expiration of federal supplemental employment benefits would start to force workers back, which would be an offsetting factor. One of the key takeaways from this report will be whether that shift is in fact happening—as preliminary data suggests it is not. The ADP report, for example, shows job growth in the leisure and hospitality sector, the one most potentially affected by the expiration of benefits, rising by only 139,000, less than previous months.
The ADP report has historically not been a particularly good indicator for the official numbers. But in this case, the substantial miss against expectations suggests there is a real downside risk on Friday, and we have to account for that.
First, let’s establish the context. For the year so far, monthly job growth has been variable, ranging from 233,000 in January to 850,000 last month. If we come in below last month, we are still within the range. The economy can still be growing at a healthy pace, even if we don’t see the expected acceleration.
If we drop back below about 300,000, that would be a concern, showing that the medical issues and labor shortages really could be slowing the recovery. A reasonably healthy level would be around the average for the year, or about 300,000 to 400,000. That result would be okay, but it would still signal some slowing.
A better result would be in line with the average for the second quarter, or around 500,000 to 600,000. This would show that the recovery continues and that while the medical and labor issues are preventing further acceleration, the economy still has enough momentum to keep moving forward at a reasonable rate. Finally, anything over 600,000 would signal that the headwinds are still not enough to push growth down and would be positive going forward.
And that will be the real question here: are the headwinds enough to derail the recovery? I suspect they are not, and we will see job growth of around 600,000, enough to keep us going but reflecting the headwinds. From a policy perspective, this could be viewed as the sweet spot, high enough to keep demand growing but low enough that the Fed will not feel compelled to start pulling back. So, while there are certainly risks, the big picture is likely to remain positive.
Keep in mind, one month is only one month. A good (or bad) result will not definitively mean anything. It will, however, give us a first impression of how the economy is adjusting.