Payroll Gains Probably Sustained in June: U.S. Economy Preview

Employers in the U.S. probably created almost as many jobs in June as in the prior month as businesses grew more confident the economy will overcome the tax increases and government cutbacks that have restrained growth, economists said before reports this week.

Payrolls grew by 165,000 workers after rising by 175,000 in May, according to the median forecast of 70 economists in a Bloomberg survey ahead of July 5 figures from the Labor Department. Other reports may show manufacturing is making little progress, while service industries are picking up.

More jobs and the rebound in housing will probably keep shoring up Americans’ finances and confidence, sustaining spending even in the face of the two percentage-point increase in the payroll tax and the $85 billion in federal budget cuts that took effect earlier this year. Federal Reserve policy makers said last month that they’ll trim bond purchases before the end of the year if unemployment continues to fall.

“The fact that the economy is growing as well as it seems to be, despite the heavy headwinds, is a testament to its much-improved underlying fundamentals,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. “Companies are seeing their demand improve both from the consumer and business side of the equation and they’re already running with very tight labor components.”

The Labor Department’s report will also show the unemployment rate retreated to 7.5 percent in June, matching April’s four-year low, from 7.6 percent a month earlier, according to the survey.

Market Reaction

Stocks and Treasuries have fallen since June 19, when Fed Chairman Ben S. Bernanke said the central bank could start reducing its $85 billion in monthly bond purchases later this year and end the program in the mid-2014 if growth meets policy makers’ forecasts.

The Standard & Poor’s 500 Index rebounded last week after the worst back-to-back declines since November.

The Fed has said it will maintain asset purchases until the labor market has “improved substantially,” without defining that term. At the June 19 press conference, Bernanke said he expects the jobless rate to be around 7 percent when the Fed stops its bond buying.

Household purchases, which account for about 70 percent of the economy, rebounded last month, recovering from a decline in May, and incomes advanced 0.5 percent, more than projected, the Commerce Department reported last week.

Home Sales

Data from the agency also showed new-home sales reached a five-year high in May and business investment plans improved for a third straight month.

“People have the ability to spend money, consumer sentiment is up, things are looking up in the U.S. economy,” said Gregory Hayes, chief financial officer at United Technologies Corp.

The Hartford, Connecticut-based maker of Carrier air conditioners and Otis elevators is benefiting from low interest rates, which have helped boost home construction.

“We have seen very strong orders growth in the residential business so far this year,” Hayes said at a June 13 conference. The automatic across-the-board federal cuts known as sequestration will probably hurt sales “a little bit,” he said, “but frankly, the rest of the economy is growing so well we don’t think it’s going to have a major impact on us.”

Still, manufacturing overall has been slow to reap the benefits of growing U.S. demand as emerging markets such as China cool and Europe struggles to emerge from a recession. The Institute for Supply Management’s factory index, due tomorrow, probably rose to 50.5 in June from 49, which was the lowest since June 2009. A reading of 50 is the dividing line between growth and contraction.

‘Uneven Path’

“Things are starting to pick up but it’s going to be an uneven path toward growth,” said Thomas Simons, money market economist at Jefferies & Co. Inc. in New York.

The resulting slackening in global trade means the U.S. gap between exports and imports was little changed in May, economists project a July 3 report from the Commerce Department will show. The trade deficit eased to $40.2 billion from $40.3 billion in April, according to the Bloomberg survey median.

Services, which are less influenced by overseas demand and account for almost 90 percent of the economy, are faring better than factories. The Institute for Supply Management’s non-manufacturing index probably climbed to a three-month high of 54 in June from 53.7, according to a Bloomberg survey.

                        Bloomberg Survey
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
Construct Spending MOM%   7/1       May       0.4%      0.6%
ISM Manu Index            7/1       June      49.0      50.5
Vehicle Sales Mlns        7/2       July      15.2      15.5
Trade Balance $ Blns      7/3       May      -40.3     -40.2
ISM NonManu Index         7/3       June      53.7      54.0
Nonfarm Payrolls ,000’s   7/5       June      175       165
Private Payrolls ,000’s   7/5       June      178       175
Unemploy Rate %           7/5       June      7.6%      7.5%
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