Slowing private payroll growth in June, an indicator of broader labor market performance, will play a key role in whether the Federal Reserve cuts interest rates later this month.
Non-government employers added 102,000 jobs, according to a Wednesday report from payroll-services provider ADP that economists view as a gauge of overall hiring. While a sharp rebound from gains of 41,000 in May, it’s still well below the average of 224,000 for the first four months of 2019.
“The job market continues to throttle back,” Mark Zandi, chief economist of Moody’s Analytics, said in a statement. “Job growth has slowed sharply in recent months, as businesses have turned more cautious in their hiring.”
The slowdown described by APD, led by declines at manufacturing, construction, and mining firms, is reflected in forecasts for the U.S. Labor Department’s broader assessment, scheduled to be released on Friday. Economists predict employers including federal, state, and local governments added 163,500 workers.
As with the ADP data, that would represent a sharp turnaround from tepid expansion in May, while still reflecting reluctance to hire new employees after the Trump administration more than doubled tariffs on $250 billion of Chinese imports and threatened duties on the $300 billion-plus in remaining goods.
The duties have pushed up the price of supplies for U.S. manufacturers, while eating into their profits and raising costs for customers.
Fallout from the White House’s trade disputes, which extend from Beijing to Europe and Japan, have raised the odds that the Fed will reduce interest rates, a move Trump has long advocated. While the central bank’s monetary policy committee will probably prioritize business confidence and investment in deciding whether to cut rates in July, job growth will affect the odds, said Robert Martin, an economist with the Swiss lender UBS.
If the U.S. adds more than 185,000 jobs, he said, the odds of a July rate cut will fall. If the labor market grows by fewer than 100,000 positions, the odds increase.
“It’s one of the more critically important monthly readings we’ve had in some time,” Mark Hamrick, senior economic analyst for Bankrate.com, told the Washington Examiner. Job growth sagged below 100,000 – the number needed to keep pace with population growth – in two of the first five months of the year, he noted.
The question now is how much the labor market will slow and “whether there is going to be a Federal Reserve rate hike, as investors are heavily betting there will,” he said.
If job growth in June is similar to the 75,000 positions added in May, a July rate cut is probably warranted, said Michelle Meyer, an economist with Charlotte, N.C.-based Bank of America.
“This is not a Fed that’s willing to tolerate any signs of a recession,” she said. “They want to sustain the recovery.”
The lender predicts at least three rate cuts, which would take the benchmark federal funds rate to a range of 1.5% to 1.75%, down from a current level of 2.25% to 2.5%.
Trading in interest-rate futures tracked by CME Group’s Fed Watch Tool indicates a 70% change that the central bank’s monetary policy committee will trim rates by 25 basis points at its July 31 meeting.
