NFP Predication – Will it Drive the USD Lower?

I’m expecting that the payroll growth will decrease to 175,000 -170,000 in June, down from May's 272,000. The unemployment rate is forecasted to stay steady at 4.0%. Wage growth is anticipated to drop to a post-pandemic low of 3.9% year-over-year.

Unemployment Rate Focus

The June employment report, set for release on July 5, will likely spotlight changes in the unemployment rate more than payroll figures. The rise in joblessness in May overshadowed an otherwise positive labour market outlook. Another increase could trigger the Sahm rule, which signals a recession if the three-month average unemployment rate climbs by 0.5 percentage points or more from its previous 12-month low. 

Demographic Breakdown

In May, unemployment rose primarily among young adults (ages 20-24), while the prime-age group (25-54) saw no change in their unemployment rate over the past three months. This spike in youth unemployment may be due to seasonal job market fluctuations. A similar pattern was observed in May 2023, followed by a normalization in June. If this trend repeats, the overall unemployment rate should not rise further in June.

Sahm Rule Implications

To trigger the Sahm rule in June, the unemployment rate would need to rise to 4.2% or higher. My forecast of a stable 4.0% rate suggests this threshold will not be met. I expect a gradual increase in unemployment by year-end, which would not trigger the Sahm rule due to the upward adjustment of the 'low' unemployment rate over the previous 12 months.

Labor Market Health

Despite a decline in job openings indicating cooling labour demand, the labour market remains robust. A 23,000 increase in jobless claims between May and June suggests a slight uptick in layoffs, but job availability remains high. The Conference Board’s labour differential index supports this, remaining at levels typical of business expansion.

Sector-Specific Employment

Healthcare, leisure/hospitality, and state/local government sectors are driving robust payroll employment, accounting for nearly half of recent job gains. Employment in these sectors is still 2 million below pre-COVID levels, which could take about eight months to recover at the current hiring pace (250,000 jobs per month).

Wage Growth Trends

Wage growth is expected to continue its moderation. With the labour market rebalancing, average hourly earnings (AHE) growth should slow to 0.3% month-over-month in June from 0.4% previously. This would result in a new post-pandemic low of 3.9% year-over-year. Historically, AHE growth around 3% aligns with core PCE inflation growth of 2%.

The June employment report is anticipated to show a deceleration in payroll growth and wage increases, with the unemployment rate holding steady. Sector-specific employment remains strong, particularly in healthcare, leisure/hospitality, and government sectors. While the labour market is cooling, it remains healthy, and the projected trends indicate stability without triggering recession indicators like the Sahm rule.

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