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Employment Gains Seen Strong, But Wages Tepid

U.S. job growth likely remained strong in March, underpinning economic growth, but tepid wage gains and weak global demand could keep the Federal Reserve cautious about raising interest rates this year.

Nonfarm payrolls probably increased 205,000 last month after rising 242,000 in February, according to a Reuters survey of economists. The unemployment rate is seen holding steady at an eight-year low of 4.9 percent in the U.S. Labor Department data due for publication on Friday.

A job seeker fills out papers at a military job fair in San Francisco
A job seeker fills out papers at a military job fair in San Francisco, California, August 25, 2015. REUTERS/Robert Galbraith

The labor market has largely shrugged off slowing global economic growth, a robust U.S. dollar which has hurt manufacturing exports, and cheap oil which has hit energy sector profitability. Limited wage increases though have left the Fed wary about further rate hikes even as the labor market tightens.

"The March employment report will show that the U.S. economy is doing fine, but the Fed is very much focused on global developments right now and job growth takes a backseat," said Thomas Costerg, senior U.S. economist at Standard Chartered Bank in New York.

Fed Chair Janet Yellen said on Tuesday that slowing global growth and lower oil prices posed a downside risk to the domestic economic outlook, adding that she considered it appropriate for policymakers to "proceed cautiously in adjusting policy."

Fed officials last month downgraded their economic growth expectations and forecast only two more rate rises this year. The U.S. central bank raised its benchmark overnight interest rate in December for the first time in nearly a decade.

Financial markets have almost priced out the likelihood of a rate hike at the Fed's June policy meeting and see a roughly 47 percent chance of an increase in November and 57 percent probability at the December meeting, according to CME FedWatch.

The Labor Department's closely watched jobs report will be released on Friday at 8:30 a.m.

It will come on the heels of recent data showing sluggish consumer spending, weak business investment on capital in the first two months of the year, as well as some deterioration in the international trade balance, which prompted economists to slash their first-quarter GDP growth estimates to as low as a 0.9 percent annualized pace from as high as a 2.0 percent rate.

The economy grew at a 1.4 percent rate in the fourth quarter.

Though employment gains have slowed after averaging 282,000 jobs per month in the fourth quarter, there is little labor market strain from the global slowdown, which helped to ignite a massive stock market sell-off at the start of the year.

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First-time applications for unemployment benefits are near the lowest levels seen in 1973. Economists attribute the pullback in job gains to the inability of companies to find qualified workers for vacant positions.

"Although first-quarter growth may not have been quite as strong as we initially believed, the resilience of the labor market suggests that the economy is not in any serious trouble," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Wages likely increased last month, with average hourly earnings forecast rising 0.2 percent after slipping 0.1 percent in February. That would leave the year-on-year earnings gain at 2.2 percent, unchanged from February.

Economists say an economic growth rate of between 3.0 and 3.5 percent in wages is needed to lift inflation to the Federal Reserve's 2.0 percent target. Though the Fed's preferred inflation measure is currently at 1.7 percent, Yellen has expressed skepticism over the sustainability of gains citing transitory factors.