US payrolls preview: July jobs report faces seasonal headwinds

​​​Consensus expects modest job gains amid seasonal uncertainty

​Friday's non-farm payrolls (NFPs) report presents economists with unusual forecasting challenges, with the consensus settling around 107,000 new jobs for July. However, forecasts span a wide range from 110,000 to 190,000, reflecting significant uncertainty around seasonal adjustments.

​The primary source of confusion stems from local government employment patterns, where extended school years and delayed federal funding releases could distort typical seasonal patterns. Such uncertainty often translates into heightened market volatility around the release.

​If job growth comes in around consensus levels, the three-month average would suggest underlying momentum of approximately 150,000 monthly gains. However, economists caution that birth-death model adjustments could mean true underlying growth is closer to 70,000 positions.

​Sectoral trends highlight economic crosscurrents

​The sectoral breakdown reveals an economy navigating competing forces across different industries. Local government education could provide the largest boost, potentially adding up to 56,000 positions as extended school years and federal funding releases take effect.

​Transportation and logistics sectors are expected to contribute around 23,000 jobs, benefiting from the ongoing tariff truce and associated import stockpiling activities. This strength reflects how trade policy continues to create ripple effects throughout the employment landscape.

​Construction is forecast to add approximately 32,000 positions, driven primarily by non-residential projects linked to infrastructure spending programmes. This contrasts with residential construction's ongoing struggles amid high mortgage rates and affordability challenges.

​However, federal government employment faces continued pressure, with expectations for a fifth consecutive monthly decline of around 16,000 positions. Information, finance, business services, and private education sectors are also anticipated to shed jobs, highlighting the uneven nature of current labour demand.

​Labour market indicators paint mixed picture

​Recent labour market indicators provide a somewhat mixed but generally resilient picture ahead of Friday's report. Initial jobless claims dropped by 25,000 between survey periods, while continuing claims fell by 9,000, suggesting limited deterioration in employment conditions.

​The NFIB small business hiring intentions survey points to headline growth of around 140,000 jobs, broadly consistent with consensus expectations. However, more sophisticated nowcasting models suggest potential for stronger growth, though such models can prove volatile.

​The household survey is expected to show a slight uptick in unemployment from 4.1% to 4.2%, despite marginally higher labour force participation. This modest increase would still leave unemployment well below the Federal Reserve's (Fed) year-end forecast of 4.5%.

​Wage pressures persist despite cooling trends

​Average hourly earnings are expected to accelerate to 0.3% month-on-month (MoM) from June's 0.2% reading, pushing annual wage growth to 3.8% from 3.7%. While this represents a deceleration from peak levels, it maintains wage pressures above the Fed's comfort zone.

​The average workweek is forecast to remain steady at 34.2 hours, suggesting stable labour demand without dramatic shifts in employment patterns. This stability supports the Fed's assessment that the labour market isn't currently driving inflation concerns.

​However, the persistence of wage growth above 3% continues to present challenges for policymakers focused on achieving their 2% inflation target. The gradual cooling process remains slower than many officials would prefer.

​Fed policy calculus remains data-dependent

​The labour market continues to demonstrate resilience despite facing multiple headwinds including tariffs, stricter immigration policies, housing market pressures, and public sector budget constraints. This strength complicates the Fed's policy assessment as officials balance growth concerns against inflation persistence.

​Current unemployment levels remain comfortably below the Federal Open Market Committee's (FOMC) year-end projections, suggesting the labour market isn't weakening as rapidly as some policymakers anticipated earlier in the year. This provides the central bank with continued policy flexibility.

​However, Fed officials are unlikely to shift policy based on any single employment report, maintaining their focus on broader trends across inflation and labour market data. The central bank's data-dependent approach requires sustained evidence of cooling before policy changes.

​The base case remains for one 25 basis point rate cut in December, though this timeline could accelerate if both inflation and labour market conditions cool more significantly.