The main focus of this holiday-shortened week will be the first major economic reports for June: the readings on manufacturing and nonmanufacturing activity from the Institute for Supply Management and the employment report from the Labor Dept. Both will offer evidence on whether the economy is still afloat or starting to sink, and whether growth is firm enough to allow the Federal Reserve to begin lifting rates later this year. The betting in the markets is for more signs that the economy remains weak, but is not falling off a cliff.
That’s pretty much the way the Fed saw it at its June 24-25 policy meeting. While leaving its target rate at 2%, the policymakers scaled back their worries about economic growth and upgraded their concerns about future inflation. Chances of any rate hikes this year will depend on how the data fall, and reports from the ISM and the Labor Dept. in June and in subsequent months will be some of the key indicators to watch to determine whether the economy is strong enough to absorb higher rates.
The labor market data will hold especially important implications for both growth and inflation. Payrolls have fallen in each month since December, but the declines have been small -- half the size of those recorded in the last two recessions. Those losses could easily end up greater after the Labor Dept.’s annual revision.
So far, though, taken together with the good gains in productivity in recent quarters, the current job data appear consistent with the meager, but positive, economic growth seen in the latest reports on real gross domestic product. Job losses have been concentrated in construction and manufacturing; Employment in the service sector, which accounts of more than three-fourths of all payrolls, has been weak but is holding up much better.
The labor markets are also an important piece of the inflation outlook. If jobs continue to fall and unemployment keeps rising, then it will be very difficult for the Fed to justify hiking rates. The Fed is rightfully concerned that rising prices for energy and food are lifting expectations that inflation will be higher in the future. However, those rising expectations cannot create a broad inflationary spiral outside of energy and food unless the labor markets are strong enough to push up wages fast enough to maintain consumers’ purchasing power. In fact, the combination of rising unemployment and soaring gas prices is sharply eroding buying power.
Moreover, Fed rate hikes amid rising joblessness could create political friction with Congress. The recent and expected pace of economic growth is not fast enough to generate the job growth necessary to keep the unemployment rate from rising. Economists expect some of the steep half-point jump in May joblessness, to 5.5%, to be reversed in June, because of May’s quirky jump in teenage unemployment. However, the economy has to generate about 100,000 jobs per month just to keep the unemployment rate steady. A return to that pace anytime soon is unlikely, which would mean the jobless rate will keep climbing in the months ahead. The Fed has never raised rates while the unemployment rate is rising.
(U.S. markets and government offices will be closed Friday, July 4 in observance of Independence Day.)
Here’s the weekly economic calendar from Action Economics.
Top Economic Reports
Reports
Date
Time
For
Median Estimate
Last Period
Chicago Purchasing Managers Index
Monday, June 30
9:45 a.m.
June
48.8
49.1
ISM Index (Manufacturing)
Tuesday, July 1
10:00 a.m.
June
49.0
49.6
Construction Spending
Tuesday, July 1
10:00 a.m.
May
-0.5%
-0.4%
Domestic Auto Sales (Millions)
Tuesday, July 1
afternoon
June
5.4
5.5
Domestic Light Truck Sales (Millions)
Tuesday, July 1
afternoon
June
5.2
5.0
Factory Orders
Wednesday, July 2
10:00 a.m.
May
0.3%
1.1%
Nonfarm Payrolls (Thousands)
Thursday, July 3
8:30 a.m.
June
-50
-49
Manufacturing Payrolls (Thousands)
Thursday, July 3
8:30 a.m.
June
-23
-26
Unemployment Rate
Thursday, July 3
8:30 a.m.
June
5.3%
5.5%
Average Hourly Earnings
Thursday, July 3
8:30 a.m.
June
0.3%
0.3%
Weekly Hours Worked (Hours)
Thursday, July 3
8:30 a.m.
June
33.7
33.7
ISM Index (Nonmanufacturing)
Thursday, July 3
10:00 a.m.
June
51.1
51.7