Let’s cut to the chase: It doesn’t really matter if 100,000 or 200,000 new jobs were created in July. What matters is whether companies are paying workers more because of a tight labor market, an outcome that could trigger higher inflation and interest rates.
Here’s what to watch on Friday in the government’s employment report for July. Economists polled by MarketWatch predict an increase of 193,000 new jobs.
Rising cost of laborExecutives and companies bemoan a lack of skilled labor to fill a record number of job opening. And the complaints are growing louder.
It “continues to be a struggle to fill open positions,” an executive at a manufacturer of food products told the Institute for Supply Management in its latest snapshot of the U.S. economy.
So wages are going up, right? Well, yes, but still not as rapidly as in past economic good times.
Hourly pay rose at a 2.7% yearly rate as of June, but that’s well below the 4% peak during the last expansion that lasted from 2001 to 2007. Wages typically rise 3% to 4% a year when the economy is running full tilt.
Read: Screaming labor shortage forcing firms to get creative to fill record job openings
Perhaps an even better gauge, the employment cost index, rose in the second quarter at a 2.8% yearly pace — the biggest gain in 10 years. Once again, though, increases ranged well above 3% during the presidency of George W. Bush.
Read: Worker pay and benefits climbing at fastest pace in 10 years
Despite worsening labor shortages, companies have managed to keep a lid on labor costs. They’ll offer a bit more to attract new employees or keep valued ones from defecting to rivals. And in some cases they’re dangling more lucrative benefits. But broad pay increases have not been the norm.
The Federal Reserve is watching closely to see if it changes. If wages start to surge and feed into inflation, the central bank will keep raising interest rates until inflation is tempered. Doing so could eventually slow the economy and shift more money into bonds from stocks.
The state of hiringThe supposed shortage of skilled labor isn’t preventing firms from finding ways to add more workers. The payroll-processing giant ADP, for example, said companies in the private sector added 219,000 new jobs in July.
The ADP tally sometimes is way off compared to the government’s official sum, but economists predict the Bureau of Labor Statistics will report a gain of close to 200,000.
So far this year, the U.S. has generated an average of 215,000 new jobs a month. That’s well above the 182,000 average in 2017 and 195,000 in 2016.
Eventually hiring has to slow. If not because of a labor shortage, then because of a brewing trade war or the fading effects of tax cuts and higher federal spending. But the good times could go on awhile longer.
Read: Why Trump has tamped down trade tensions with Europe, but not China
Falling unemploymentThe rate of unemployment bumped up to 4% in June from an 18-year low of 3.8%, but the number doesn’t come close to telling the whole story.
For one thing, the rate rose in part because more people entered the labor force in search of work. That’s a good thing: It means those without jobs think decent employment opportunities are easier to find.
The uptick won’t last long, either. Most economists think the unemployment rate will drop toward 3% and touch the lowest levels in more than half a century.
“Unemployment seems destined to go into the low 3s [in percentage terms],” said Chief Economist Mark Zandi of Moodys Analytics. “We have only gotten that low in major wars” such as World Wars One and Two.
