Solid US job gain in May could set stage for summer Fed hike

WASHINGTON – Friday’s U.S. jobs report for May will provide a crucial piece of data for the Federal Reserve to weigh in deciding whether to raise interest rates later this month.

Economists have estimated that employers added 160,000 jobs for a second straight month, according to data provider FactSet. That would be a solid gain, though below the average increase of 232,000 for the past year. The unemployment rate is expected to remain at a low 5 per cent.

Many analysts think the Fed will refrain from raising its key short-term rate when it meets in two weeks before increasing rates at its subsequent meeting in late July. It might take a much bigger-than-expected job gain in May — well above 200,000 — to nudge the Fed toward a rate hike this month.

Last month’s hiring figure may have been distorted by a strike at Verizon, which caused about 40,000 workers to walk off the job. The striking employees, now back to work, won’t be counted as employed during May — a fact that could depress the job gain.

The strike could also lower other figures in the jobs report, such as average hourly pay. As a result, the Fed might find it hard to derive a clear picture of the job market from Friday’s data.

Still, the report will be scrutinized for evidence that the economy has accelerated after a slump early this year. The government has estimated that the economy grew at just a 0.8 per cent annual rate in the January-March quarter. More recent figures indicate that growth has since strengthened. But the Fed may want additional data to ensure that the improvement is sustained.

Investors collectively estimate only a 21 per cent chance that the Fed will raise rates on June 15, according to futures trading on the Chicago Mercantile Exchange. The likelihood rises to 60 per cent for the Fed’s July meeting. Both figures are a marked shift from a month ago, when June and July were seen as much less likely.

But most economic reports since then have been encouraging: Consumer spending surged in April. Americans ramped up purchases of autos and other big-ticket items, like appliances.

Home sales and construction have also increased. Sales of new homes reached an eight-year high in April.

Even manufacturing, which has suffered from weak growth overseas and a strong dollar that has depressed exports, is showing signs of stabilizing. Factory activity expanded in May for a third straight month, according to a survey of purchasing managers.

In December, after months of economic improvement, the Fed raised its benchmark short-term rate after pegging it near zero for seven years. In March, officials indicated that they expected just two additional increases this year.

David Joy, chief market strategist for Ameriprise Financial, said the Fed will want to leave time after its next rate hike to gauge how the economy responds. There may not be enough time for two hikes this year unless the Fed acts by July.

“June is too early, but September is too late,” Joy said.

Chair Janet Yellen has long made it clear that she studies a “dashboard” of job market data to help assess the economy’s health, rather than a single number such as hiring or unemployment.

Michael Hanson, an economist at Bank of America Merrill Lynch, says that even a modest job gain for May, such as 130,000, wouldn’t necessarily keep the Fed from raising rates by July — if other economic barometers improve.

A solid increase in average hourly pay, for example, would suggest that many employers are struggling to find enough qualified workers and are finally willing to pay more. That would be a possible sign of full healing in the job market.

Fed officials may not keep investors guessing for long: Yellen will speak Monday in a closely watched address that may show how she has interpreted Friday’s report.

And Lael Brainard, a Fed official who is a longtime skeptic of raising rates, will speak Friday, a few hours after the jobs figures are released. Any sign that Brainard is willing to accept higher rates would likely be seen as evidence that Yellen — and the Fed — may act soon.