As the U.S. Federal Reserve gears up for a crucial rate-setting meeting later this month, all eyes are on the May jobs report. The Friday release, a final insight into employment before the Fed's decision, is expected to reflect an economy recovering its balance despite a temporary dislocation from the Verizon strike.
Although the report isn’t expected to be particularly stellar, neither is it likely to derail the monetary policy course indicated by Fed officials, a number of whom have signaled that a rate hike could come as soon as this summer.
“I can’t think of a jobs report recently that has been as important as this one,” said Laura Rosner, senior U.S. economist at BNP Paribas in New York. “If it confirms a rebounding economy, the Fed could well move ahead with a rate hike.”
Economists surveyed by Reuters expect to see payrolls increasing by 164,000 jobs in May, following a disappointing gain of 160,000 in April. The headline unemployment rate is expected to remain at 5 percent. The economy needs around 100,000 new jobs each month just to keep up with population growth.
Here are three questions to ask in advance of Friday.
1. Will the Verizon Strike Show Up in the Data?
The recently concluded strike by workers in Verizon’s landline division represented the largest labor disruption in five years, bringing tens of thousands of employees out of call centers and onto picket lines.
Since striking workers are counted as unemployed by the Bureau of Labor Statistics, the action is likely to be felt in the monthly jobs tally. The strike “likely depressed the May jobs data,” analysts at Bank of America Merrill Lynch wrote in a note to investors this week.
A total of 35,100 Verizon employees were counted as idle during the survey period for the May jobs report, a release last week from the Labor Department showed. That number is likely to be reflected in the tally for information industry employment, which took a substantial hit after Verizon workers went on strike in 2011. The hiring of temporary workers to fill the gaps could ease the impact, however.
The company reached a tentative deal with workers’ representatives last week. The deal promises raises and more call center positions. Verizon employees are expected to return to work this week.
2. Is Labor Force Participation Still on the Mend?
Up until April, the job market had exhibited one of the most heartening trends since the start of the recovery: For six months in a row, working-age adults returned from the sidelines of the labor market and entered the workforce, pushing the labor force participation rate up after decades of steady decline.
In all, 2.4 million Americans returned to the labor force during the past six months. “It’s an enormous gain compared to what’s been happening since the end of the recession,” said Dan North, chief economist at Euler Hermes North America, the world’s largest provider of credit insurance for corporate trade.
But the labor force participation rate pared its gains in April, showing a 0.2 percent decline. Economists will be watching the data closely to see if April was a one-off dip or the beginning of a reversion to the mean.
The stakes are high for the economy. When adults return to the workforce, they dry up reserves of slack in the labor market, putting upward pressure on wages paid by employers, who have a smaller pool of potential employees to fill positions.
The dynamics can have contradictory effects, however. That’s particularly true when adults previously counted as outside the labor force enter back in, but without jobs. That movement can actually increase the unemployment rate, complicating the picture.
“The fact that more workers have been re-entering the labor market is positive news for the U.S. economy,” Rosner said. But on the flipside, she said, it could stay the Fed’s hand until it’s clear that the labor market is nearing capacity. “It suggests that there could be some shadow slack that is now being absorbed.”
3. When Will Wages Break Out?
Positive pressures have also been mounting around wages. In a recovery marked by a tepid pace of gains for ordinary workers’ earnings, the past six months have brought annual wage gains averaging nearly 2.5 percent.
That’s better than any other extended period since 2009 — but still shy of a 20-year average of 3 percent.
Though Fed officials in general see wage growth as a lagging indicator, following behind other measures of economic health, earnings are a key piece in the labor market puzzle. Consistent increases in take-home pay reflect a healthy, competitive market with a minimum of slack.
“If we were to see wage growth picking up, it would build confidence that the economy is operating at or near full capacity,” Rosner said. BNP Paribas has a dimmer outlook for the May report than most economists, projecting just 110,000 jobs added as the labor market absorbs economic shocks sustained in the first quarter of the year.
But outside of jobs reports, recent data have painted a positive picture around wages. Real disposable income, reported earlier this week, increased at a 3.3 percent annual clip last month, the 19th consecutive period of above-3-percent growth for this indicator, which reflects the total take-home pay of American workers.
Strong data around wages wouldn’t be decisive for the Fed, but it would weigh on a June rate hike. Fed Chair Janet Yellen last week cited the absence of “much improvement” in wages as “suggestive of some slack in the labor market.”
In the Fed’s Beige Book released Wednesday, officials noted that “wages grew modestly, and price pressure grew slightly” since April.
Still, thinning corporate profits could prove a headwind to wage growth. Corporations in the Standard & Poor’s 500 have reported declining year-on-year earnings for the last six quarters, raising the pressure to tamp down wages.
“If you’re a corporation that’s losing money, you’re going to pinch costs as much as possible on new hires,” North said.