Expected Job Gains Seen as Boost to Economy

U.S. employment likely increased at a healthy clip in July, with wages picking up, which should help to underpin consumer spending and boost the economy.

The Labor Department's closely-watched employment report on Friday will probably show that nonfarm payrolls increased by 180,000 jobs last month, according to a Reuters survey of economists. While that would be a step down from June's 287,000 surge, July's expected gain would still be above the average monthly advance of 171,500 jobs over the first half of the year.

June's robust hiring, which followed a mere 11,000 gain in May, was viewed as unsustainable given that the economic growth in the last three quarters averaged a 1.0 percent annualized rate.

Should job growth meet expectations, it would reinforce the Federal Reserve's confidence in a labor market that officials view as at or near full employment, economists say. Fed Chair Janet Yellen has said the economy needs to create just under 100,000 jobs a month to keep up with population growth.

"The Fed is likely to take encouragement from this jobs report as even a 180,000 print will still be consistent with further progress in absorbing labor market slack," said Millan Mulraine, deputy chief economist at TD Securities in New York.

"Nevertheless, it is unlikely to change the dial on their wait and see policy stance," he said.

After a policy meeting last month, the Fed described the labor market as having "strengthened" and that the job market measures pointed to some "increase in labor utilization."

The U.S. central bank hiked interest rates in December for the first time in nearly a decade, but has held them steady since amid concerns over persistently low inflation. Most economists expect another rate hike in December, though financial markets have almost priced out that possibility.

Pointing to labor market strength, the unemployment rate is forecast to have dropped one-tenth of a percentage point to 4.8 percent. In addition, average hourly earnings are expected to have increased 0.2 percent after edging up 0.1 percent in June. That would keep the year-on-year gain at 2.6 percent.

There is, however, a chance earnings could surprise on the upside, given favorable calendar effects.

DIMINISHING SLACK

"As the labor market continues to tighten, I think we will see wage growth further accelerate," said Gus Faucher, deputy chief economist at PNC Financial Services Group in Pittsburgh. "Consumers are driving economic growth right now and one of the reasons is that wage growth has gotten a bit stronger."

A solid gain in payrolls would add to July auto sales in underscoring the economy's sound fundamentals. Economic growth is expected to accelerate to at least a 2.5 percent annualized rate in the third quarter.

With the bulk of the labor market slack largely absorbed and the economy's recovery from the 2007-09 recession showing signs of aging, payroll gains will probably drift to average between 150,000 and 160,000 jobs per month in the second half of 2016, economists say.

"Don't expect job gains to match the previous few years increases because the low number of unemployed and the declining supply of those not in the market makes it hard to hire lots of people," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The manufacturing sector is expected to have added jobs in July for a second straight month. Payroll gains are also forecast for the construction sector after three consecutive months of weakness. While mining likely shed further jobs in July, the pace of layoffs probably continued to abate amid increases in oil rigs.

Other details of the employment report are expected to show a steady rise in entrants into the labor market. That would keep the labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, at 62.7 percent.

(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Diane Craft)