Economic Preview: Steady jobs growth best thing going for up-and-down U.S. economy

WASHINGTON (MarketWatch) — The one thing the U.S. economy unabashedly has in its favor is a boom in hiring.

So long as companies continue to hire at a steady clip — the U.S. has gained an average of 243,000 new jobs a month since 2014 — the economy is likely sidestep the occasional potholes that keep cropping up in its path.

Take the first quarter. The economy contracted by 0.7% in the first three months of the year, bludgeoned by harsh weather, falling exports, lower business investment and a dockworker’s strike.

Yet even though hiring also slowed, the U.S. has still added an average of 194,000 jobs so far in 2015. Economists say that’s more than enough to outstrip the increase in the working-age population and nudge the unemployment rate lower over time.

The week’s employment report for May is expected to produce another solid gain in jobs: economists surveyed by MarketWatch predict a 218,000 increase. The unemployment rate is likely to remain at 5.4%.

The employment report is the best single bellwether of how well the economy is doing. The official report on gross domestic product appears to have significant flaws and it’s generally viewed as more backward looking. Other indicators are too narrow in scope.

Also read: Three times rotten: A recovery hasn’t seen this many dips since the 1950s

When companies increase hiring, however, they are making a firm bet that demand for their goods and services will continue to increase, or even accelerate. That appears to be the case in the second quarter. U.S. growth has rebounded in the spring and the economy is forecast to grow around 3%, the MarketWatch forecast shows.

Yet with the unemployment rate closing in on 5%, a growing number of analysts predict the pace of job creation will soon taper off, perhaps by the end of the year.

“You do need to expect employment growth to slow substantially over the next few years,” said Jeremy Lawson, chief economist of asset manager Standard Life Investments. “You can’t continue to get 200,000 to 250,000 jobs a month in an economy growing just 2% to 2.5% a year.”

The only way to sustain those kind of employment gains is through higher consumer spending that lifts annual U.S. growth much closer to its historic 3.3% average. But that in turn would require either businesses to boost wages, giving Americans the cushion to spend more, or households dipping into savings to go out to eat more and get that big HDTV they’ve been ogling.

More bullish economists pin their hopes on bigger increases in the size of paychecks after years of sluggish wage growth. They see hourly wages rising 3% or higher from the post-recession rate of 2%, as the tightening labor market forces companies to pay more to attract or hold onto talented workers.

So far there’s little evidence that’s happening. One reason might be the still-large number of Americans — some 17 million — who say they want a full-time job but can’t find one. If they are counted as unemployed, the jobless rate is actually closer to 11%.

“That’s not a number that tells me the labor market is tight,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute. He thinks hourly wages will rise a bit, but probably to no more than 2.5% a year.

The grudging increase in wages helps explain why consumers aren’t spending all that much these days, at least on so-called discretionary items (i.e., fun stuff). And the report for April due Monday is likely to deliver another disappointment. Consumer spending is seen edging up just 0.1%.

Softer sales at auto dealers and other retailers as well as lower spending on gasoline and utilities is likely to keep a cap on consumer outlays in the first month of the second quarter.

“We are not going to see a surge in consumer spending,” Wren said. “It’s up, but only gradually so.”

That about sums up the U.S. economy as it enters the seventh year of the weakest recovery in the postwar era. It’s growing, but unevenly and slowly.

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