The June payroll gain we project would leave a 183,000 average monthly gain in the first half of 2005, which is exactly the monthly average of 2004. Data in line with our forecast would imply that the labor market continues to post healthy growth.
Looking at other key components of the June report, we forecast the unemployment rate to remain at 5.1% (vs. the 5.2% median forecast), while the average workweek holds at 33.8 hours (median 33.8) for the third straight month. We expect hourly earnings to increase by 0.3% (median 0.2%).
STRONGER SENTIMENT. What makes us think that payrolls will come in above expectations? A solid gain is signaled by the lean initial jobless claims reading of 316,000 in the week that the Labor Statistics Bureau surveyed to gather statistics for the June report, and the low 323,000 average reading for the month. A solid employment index reading from the Institute for Supply Management's (ISM) nonmanufacturing report for the month also bodes well.
And we're encouraged by stronger consumer confidence and University of Michigan sentiment readings on the month. One down note: The employment component of the ISM's manufacturing survey for June suggests factory hiring will be limited.
Despite the optimistic outlook, investors are likely to be edgy and looking for signs of weakness in the employment report. The U.S. dollar will probably be highly sensitive to the employment figures and begin adjusting for upside U.S. employment possibilities as the July 8 release approaches.
FURTHER HIKES? The dollar has been sensitive to good news from the U.S., and a strong employment report could up the ante for the remainder of the June economic data. Treasuries will focus on the jobs data to gauge the outlook for the trajectory of the Federal Reserve's interest rate hikes through the remainder of the year.
We at Action Economics expect Alan Greenspan & Co. to stick with the "measured" policy course through at least the Aug. 9 meeting of the Federal Open Market Committee, given the indications from the June 30 policy statement. We still believe the economy is on solid footing, and we anticipate a 4% yearend Fed funds target rate -- 75 basis points above the current level of 3.25%. Englund is chief economist, and MacDonald director of global investment research and analysis, for Action Economics