The main highlight of this week’s economic data is the July employment report, released on Friday. We should expect nonfarm payrolls to rise by 150k (vs. 287k previously), which would be roughly in line with their three-month trailing average. Private payrolls are expected to increase by a slightly lesser amount. This should be enough to keep the unemployment rate steady at 4.9%. Importantly, we could see only a modest increase in average hourly earnings (+0.2% forecast vs. +0.1% previously), which would result in the year-over-year growth rate’s declining two tenths to 2.4%.
While monetary policymakers are likely comfortable with payroll gains of 150k per month as this rate would be commensurate with further declines in the unemployment rate, depressed real GDP growth remains an ongoing concern. Over the last year, real GDP has increased at a meager 1.2% rate. We are worried that with trend growth just around 1%, the economy is vulnerable to a negative exogenous shock. Moreover, with productivity growth so low, there is a risk that companies will start cutting jobs so as to only employ their most productive workers. Arguably, this is the only way firms would be able to stabilize their profit margins, which remain under significant downward pressure.