The U.S. economy likely generated roughly 150,000 jobs in July and the unemployment rate remained steady at 3.7%. The July employment report—due to be released by the government Friday—is traditionally impacted by seasonal adjustments that will likely include sharp slowing in education and government hiring along with a notable pick up in leisure and hospitality. In addition, we expect another soft increase of 0.2% in average hourly earnings, which would keep the year-ago metric at 3.1%. Given that the three-month average annualized pace has slowed to 2.73%, down from 3.32% in February and reflecting the slower pace of growth in the economy during the second quarter, we think policymakers are closely monitoring employment and wage measures as the broader economy decelerates; their influence will almost certainly play a role in upcoming monetary policy decisions.
We continue to emphasize developments in the household survey, which is used to determine the unemployment rate. Over the past six months the household survey has averaged a net gain of only 10,000 per month, while the labor force contracted by 259,000 during that period. More importantly, the insured unemployment rate has begun to increase, which is the best forward-looking indicator for the unemployment rate and implies a risk of higher unemployment going forward, and an easing of what little pressures there are on wages. We have made the case that the unemployment rate bottomed at 3.585% in April and these internal labor market dynamics support that case.
Manufacturing drags
Over the past three months, the economy has produced an average of 171,000 jobs with the private service sector expanding by an average of 128,000 per month. One of the hallmarks of the second half of 2019 will be a deceleration in the pace of hiring, which we expect to move below 150,000 jobs per month toward the end of the year. We anticipate that one year from now monthly employment gains will slow to near 50,000 and push the unemployment rate above 4% as the economy heads toward a contentious 2020 U.S. presidential election.
The July employment report will likely feature reversion to the mean among goods producing, construction and manufacturing jobs, all of which outperformed their three- and six-month moving averages in June. In particular, we are concerned about the pace of manufacturing hiring, which increased by 17,000 in June, but has produced an average of just 8,000 jobs over the past six months. On Thursday, the July manufacturing survey from the Institute for Supply Management will be published which will provide insight into the pace of manufacturing employment. We do expect business services hiring to continue expanding at a brisk pace at or near its six-month average of 35,000 per month.
