Bank of America's Jobs Report Outlook: What to Watch Beyond the Headline Number

Bank of America's Subdued Expectations for July's Jobs Report

Bank of America (BofA) is setting expectations low for Friday's jobs report, forecasting a 60,000 increase in nonfarm payrolls, below the consensus estimate of 100,000. The bank is advising investors to look beyond the headline number and focus on the composition of the data.

Diving Deeper: Private Sector Growth and Government Employment

Aditya Bhave, a US economist at BofA, suggests that June's surge in government employment may have been a seasonal anomaly. He predicts a decline of 25,000 in government jobs for July, shifting the focus to private sector performance. "We expect private payrolls to accelerate from +74k in June to +85k in July," Bhave writes. This emphasis on the private sector reflects a concern that government hiring may not be indicative of overall economic health.

The Unemployment Rate: A Key Indicator

Bhave also emphasizes the significance of the unemployment rate. Since mid-2024, it has hovered between 4% and 4.2%, a level historically low. With layoffs remaining limited and job openings only slightly below the number of job seekers, wage growth continues to outpace inflation. Bhave believes an unemployment rate of 4.1% or lower would be viewed as hawkish, signaling a tight labor market. Conversely, a rate of 4.3% or higher would suggest increased slack. The market consensus is 4.2%, up from June's 4.1%.

Federal Reserve at a Crossroads

The Federal Reserve is facing a complex dilemma. Concerns about potential weakness in the private sector labor market are clashing with fears that tariffs will fuel inflation. Fed officials are divided on the next move, with significant downside risks associated with both holding rates steady and cutting them. As Fed Governor Christopher Waller recently stated, "Private sector job growth has slowed to near stall speed," underscoring the argument for lower rates. He added, "Other data suggest downside risks to the labor market have increased. With inflation near target and upside inflation risks limited, we should not wait for the labor market to deteriorate before easing policy."

Broader Economic Outlook and Potential Risks

Many Wall Street economists and Fed policymakers anticipate the unemployment rate to climb this year. Oxford Economics expects labor market conditions to weaken and the impact of tariffs to begin affecting inflation and real consumer spending. Citi's chief US economist, Andrew Hollenhorst, believes his team primarily sees "downside risks to this week's report and the job situation over the next several months." This cautious outlook reflects concerns about the potential for an economic slowdown.

Conclusion: A Delicate Balance

Bhave notes that his forecast of 4.2% for the unemployment rate suggests the labor supply and demand remain in good balance. However, he adds that the second decimal place could be crucial: a number closer to 4.3% might be interpreted as a dovish signal by the market. The upcoming jobs report will be a critical factor in shaping monetary policy and economic growth expectations. Investors and policymakers alike will be closely scrutinizing the data for signs of strength or weakness in the labor market.