Photographer: Sam Hodgson/Bloomberg

Here's What to Watch for in Friday's Jobs Report

Workers' salaries take center stage

Economists will be looking for confirmation in Friday's May employment data that the labor market is pressing on. Job growth picked up in April on the heels of a first-quarter growth slump after 2014 marked the best year for job growth since 1999. 

Payrolls are projected to climb another 226,000 in May, according to the Bloomberg survey median. Employers added 223,000 jobs in April after an 85,000 reading the prior month that was the weakest since June 2012. 

Here's what else to watch for in the release due Friday morning:

Wages

"My eyes will be focused on wages," said Aneta Markowska, New York-based chief U.S. economist at Societe Generale. The Bloomberg survey median calls for a 0.2 percent gain from April.

The estimate is consistent with the average increase since the expansion started in June 2009. Markowska forecasts a 0.3 percent advance, which may signal this gauge of pay growth is catching up to another measure. Compared with May 2014, hourly earnings are projected to climb 2.2 percent.

Beginning in the third quarter, the hourly pay measure in the jobs report has lagged behind the wages and salaries portion of the agency's quarterly employment cost index release. The ECI's measure may provide a better signal of wage inflation because it tracks the same job over time, eliminating the effects of shifts in the mix of workers across industries that is the shortcoming of the employment report's measure.

While Federal Reserve Chair Janet Yellen has said wages aren't a prerequisite for increasing the benchmark interest rate for the first time since 2006, Bank of America Corp.'s Ethan Harris said they're nonetheless critical to the policy makers' judgment on when to normalize monetary policy.

The "real signs of wage pressure" so far have contributed to a labor market that's been moving "from intensive care to a more normal hospital room," since the recession, said Harris, the bank's co-head of global economics research.

Jobs-market slack

Measures of slack — the extent to which those in the labor pool are being underutilized — also have yet to fully recover as the world's largest economy enters its seventh year since the end of the last recession. Further progress here would bode well for paychecks, as employers struggle to retain skilled workers and attract new ones as the pool of unemployed dwindles. 

There's certainly room for improvement. Yellen's labor-market dashboard shows that underemployment and long-term unemployment gauges are among the least-improved in this expansion:

Even as the most frequently cited jobless rate is projected to have held last month at 5.4 percent, its lowest since May 2008, underemployment has shown less progress. The so-called U-6 rate, which includes part-time workers who prefer a full week of work and Americans not actively searching for a job but available, was 10.8 percent in April. That's 2 percentage points higher than the average in the four years leading to the last recession.

"The gap will narrow," and that's when you'll be able to say the market is "tight," said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. Right now, "there's still a lot of slack."

The movement in underemployment also will give jobs report fans something to watch in case the main jobless measure stagnates, said Gennadiy Goldberg, a U.S. strategist at TD Securities USA LLC in New York.

"Even if the headline unemployment rate doesn't move, we're looking for the U-6 numbers to keep improving over the next few months," he said. 

Payroll gains

Third, and certainly not least (especially in the markets' eyes), will be the headline payrolls figure. Monthly job gains have slowed so far in 2015 — averaging 193,750 compared with almost 260,000 last year. More importantly, they haven't reflected the somber tone of the decline in first-quarter gross domestic product.

"It's actually been kind of puzzling that the labor market's holding up as well as it is, in the context of a weak consumer and stronger dollar," Markowska said. Employers "do seem to be looking past the recent weakness and anticipating better numbers over the course of the year."

The weaker company balance sheets do remain a risk factor, said Keith Hembre, chief economist at Nuveen Asset Management LLC in Minneapolis and a former researcher at the Minneapolis Fed.

"Corporate revenues are pointing toward a softening in employment growth," he said.  

Here's how those monthly tallies have sized up since the start of last year:

Readings as low as 150,000 on average for the remainder of 2015 still would be enough to push the unemployment rate down to 5 percent, Hembre said. That's currently the lower end of the Fed's latest estimate for full employment.

Builders and factories

Industry-level data in the employment report could be pivotal in signaling whether the economy has healed from its ailing at the start of the year. Two battered areas — manufacturing and construction — will be in the spotlight.

"There's been visible weakness in business investment and manufacturing activity," so job gains in that sector would be helpful, said Scott Anderson, chief economist at Bank of the West in San Francisco. The latest factory orders data from the Commerce Department, showing a 0.4 percent decline in April, "didn't give much confidence."

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