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Forecasts for Job Growth Raised Amid Strong Private-Sector Data

From Reuters

An unexpectedly robust reading of private-sector employment in June raised expectations that overall U.S. job growth for the month will trump forecasts, leading to speculation that the Federal Reserve may push interest rates higher.

Also Wednesday, the Commerce Department said new orders at U.S. factories rose more than expected in May, a sign of strong manufacturing and business spending.

The monthly ADP National Employment Report, a relatively new series of data, said U.S. private-sector employers created an estimated 368,000 jobs in June, compared with 122,000 jobs the previous month.

The data forced many analysts to rethink their forecasts for the Labor Department’s June payroll data, which are due Friday, although a surge of new jobs would come at time when other data show signs of a slowing economy.

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According to the median forecast of a Reuters survey, economists now expect a solid gain of 185,000 jobs, up from 155,000 before the ADP report, and well ahead of the 75,000 logged in May. The Labor Department data include government jobs.

A large addition of jobs could boost market expectations that the Fed would raise interest rates by a quarter-percentage point at its Aug. 8 meeting for the 18th straight time in a bid to reduce price pressures in the economy.

“If we get a big June increase, for the Fed, which has already put us on notice that it is in a data-dependent mode, this would of course increase the probability of the Fed being more aggressive, that is to say, moving a quarter-point in the August meeting and possibly further beyond that,” said Richard DeKaser, chief economist for National City Corp. in Cleveland.

DeKaser raised his forecast of job growth to 279,000 from 153,000 after the ADP report, which he said could reflect strong economic growth in early 2006. Fed policymakers could be even more on their guard if a big addition of jobs is paired with a drop in the unemployment rate, which could signal looming price pressures, said Chris Rupkey, senior financial economist for the Bank of Tokyo-Mitsubishi in New York.

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However, the ADP report contrasts with what many economists see as a gradually slowing economy in the face of high energy prices, a cooling housing market and the effect of the Fed’s campaign of interest rate increases.

Measures of industrial production, manufacturing and construction spending all fell in May.

Other analysts discounted the significance of the ADP report, saying that indicators showing economic deceleration hardly point to a banner month for job creation. “It is tough to believe that in the face of what was a slowdown in demand in June that corporate America suddenly embarked on the greatest hiring spree in this five-year economic expansion,” said David Rosenberg, an economist for Merrill Lynch in New York.

The Commerce Department’s report on factory orders showed them climbing 0.7% to a seasonally adjusted $400 billion in May despite a drop in orders for transportation equipment.

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Wall Street analysts polled by Reuters had expected a 0.1% rise in the often volatile orders number after a revised April fall of 2%.

Excluding transportation, orders rose 1.2% in May. Factory orders were also higher when defense equipment was stripped out, growing 0.8% in the month.


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