A strike by Verizon workers likely crimped U.S. job gains in May, but employment growth should still be strong enough to confirm a tightening labor market and push the Federal Reserve closer to raising interest rates soon.
Nonfarm payrolls probably increased by 164,000 jobs in May after rising by 160,000 in April, according to a Reuters survey of economists ahead of Friday's closely watched employment report. The jobless rate is forecast slipping one-tenth of a percentage point to 4.9 percent.
A government report last week suggested a month-long strike by Verizon workers could slice 35,100 jobs from payrolls in May. The striking workers, who returned to their jobs on Wednesday, were regarded as unemployed because they did not receive a salary during the payrolls survey week.
Without the strike, employment would probably have risen by about 200,000 jobs, matching the monthly average for the first quarter. Economists and Fed Chair Janet Yellen say monthly gains of roughly 100,000 jobs are needed to keep up with growth in the work-age population.
The Labor Department is scheduled to release the jobs data at 8:30 a.m. It will likely confirm the economy has bounced back after growth almost stalled at the start of the year.
"As long as the report is essentially in line with April or better, we think it will support the Fed's outlook for a 25-basis-point rate hike in June or July," said Terry Sheehan, a senior analyst at Stone & McCarthy in Princeton, New Jersey.
The U.S. central bank has signaled its intention to raise rates soon if job gains continue and economic data remain consistent with a pickup in growth in the second quarter.
Yellen said last week that a rate increase would probably be appropriate in the "coming months," if those conditions were met. Data on consumer spending, industrial production, goods exports and housing have suggested the economy is gathering speed after growth slowed to a 0.8 percent annualized rate in the first quarter.
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Financial markets see a small chance of a rate increase at the Fed's June 14-15 policy meeting, but are pricing in a roughly 59 percent probability at the July gathering, according to CME Group's FedWatch program. The Fed hiked its benchmark overnight interest rate in December for the first time in nearly a decade.
Despite a tightening labor market, there is still no sign of meaningful wage growth. Average hourly earnings are forecast rising 0.2 percent in May after gaining 0.3 percent in April. That would keep the year-on-year rise at 2.5 percent.
"There is more shadow slack given the absence of a noticeable acceleration in wage growth," said Ryan Sweet, senior economist at Moody's Analytics in Westchester, Pennsylvania.
Economists say wage growth of between 3.0 percent and 3.5 percent is needed to lift inflation to the Fed's 2.0 percent target. There are, however, signs that inflation is creeping higher as the dampening effects of the dollar's past rally and the oil price plunge dissipate.
Other measures of labor market slack, including the number of Americans working part-time for economic reasons, will be watched for clues on how soon the job market will hit full employment.
A broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment is currently at an eight-year low.
Job gains in May were likely broad-based, although mining employment probably maintained its downward trend. Mining payrolls have dropped by 191,000 since peaking in September 2014, with three-quarters of the losses in support activities.
Manufacturing employment is expected to have slipped by 1,000 jobs after increasing by 4,000 in April. The Verizon labor dispute probably reduced information sector jobs by 35,100.
Retail payrolls likely rebounded after shedding jobs in April for the first time since December 2014. An improvement is also expected in temporary help jobs, which have weakened since January.