U.S. job growth probably slowed to a still-healthy level in June and the unemployment rate remained at 4%, increasing the likelihood that the Federal Reserve will be able to curb inflation without triggering a recession.

The Labor Department will release its closely watched nonfarm payrolls report on Friday, which is also expected to show wage growth slowing for the first time in three years. Together with the modest decline in inflation in May, this may confirm that the anti-inflation trend is back on track and increase Federal Reserve policymakers' confidence in the inflation outlook, pushing the Fed closer to starting to cut interest rates later this year.

Financial markets remain optimistic that the Federal Reserve will begin its easing cycle in September after aggressively tightening monetary policy in 2022 and 2023. Fed Chairman Jerome Powell said this week that the United States is back on an "anti-inflation track," but he stressed that policymakers need more data before cutting rates.

“The economy is getting into a reasonable and sustainable pace of job growth,” said Brian Bethune, an economics professor at Boston College. “There’s no sign of any sudden drop, no sign that we’re going to crash suddenly, the U.S. economy is still basically on a path to a soft landing.”

A Reuters survey of economists showed nonfarm payrolls probably increased by 190,000 last month after rising by 272,000 in May. U.S. job creation has averaged about 230,000 per month over the past 12 months.

Economists say the U.S. economy needs to create at least 150,000 jobs a month to keep up with the growth of the working-age population and make up for the impact of the recent surge in immigration. The unemployment rate rose to 4.0% in May, the first time since January 2022. Some economists expect the unemployment rate to fall to 3.9% in June.

A lagging employment indicator, the Quarterly Census of Employment and Wages (QCEW), suggests that job growth in the fourth quarter of 2023 was much slower than the payroll data. The QCEW data comes from reports submitted by employers to state unemployment insurance programs.

But economists say the QCEW data excludes undocumented immigrants, who they say contributed to last year’s strong job growth. The Labor Department’s Bureau of Labor Statistics next month will release its benchmark estimate of wages for the 12 months ending in March.

"It's possible that payrolls will be revised down, but we think that's not because the data is overstated, but because the QCEW is understated," said Sam Coffin, an economist at Morgan Stanley. "Because the QCEW may miss undocumented immigrants, if a person doesn't have proof of employment, then they are not eligible for unemployment benefits. In contrast, the payroll survey requires businesses to count employees regardless of legal status."

Currently, hiring in the United States is driven primarily by industries such as healthcare, leisure and hospitality, and state and local government education, where staffing levels have returned to pre-pandemic levels and this trend is likely to continue in June, but at a slower pace than in recent months.

Employment in most of these industries has returned to 2019 levels, and the Federal Reserve's 525 basis point rate hikes since 2022 to curb inflation have taken their toll on businesses. "In order for companies to re-staff, a lot of compensatory hiring is going to be needed, but that's largely been done across a lot of different industries," said Sarah House, senior economist at Wells Fargo.

Even though the labor market is cooling, wage growth remains sufficient to support consumer spending and the overall economic expansion.

The market expects average hourly earnings to rise 0.3% month-on-month in June, lower than the previous value of 0.4%. In addition, this will reduce the annual wage growth rate to 3.9%, the lowest increase since June 2021. A wage increase of 3%-3.5% is considered to be consistent with the Federal Reserve's 2% inflation target.

The Fed has kept its federal funds rate in its current range of 5.25% to 5.50% since July last year. Minutes from Thursday’s Fed meeting showed policymakers acknowledging that the economy appears to be slowing and that “price pressures are easing.”

Economists believe the labor market is not driving higher inflation, noting that worker productivity has picked up and worrying that the Fed could be holding back economic growth by keeping borrowing costs high for too long. Kevin Rinz, a senior fellow at the Center for Equitable Growth in Washington, said:

"Wage growth had been high but it has now come down and productivity growth has returned to its normal relationship with wage growth so there is not a huge gap between the two. It now seems unnecessary to constrain the labour market in order to keep inflation down."

The article is forwarded from: Jinshi Data