Friday's jobs report will show hiring rebounded last month after a shockingly grim April, economists say

• Friday's jobs report will show whether hiring rebounded in May or slowed further from April's weaker-than-expected pace.
• Economists are forecasting a gain of 674,000 payrolls and for the unemployment rate to hit a new pandemic low.
• Whether the report misses or exceeds expectations could shift Fed policy, Bank of America said.

The Bureau of Labor Statistics' monthly jobs report is among the most closely watched gauges of economic health, but Friday's release is even more anticipated than usual.

It's the first reading since April data showed a sharp slowdown in hiring and stupefied economists across the board. The Friday report will reveal whether the deceleration was a one-month fluke - or the start of a stagnating recovery.

Economists are largely optimistic. The median estimate for May payroll growth sees the US adding 674,000 jobs throughout the month. That would mark a sharp rebound from April's 266,000-payroll bounce. Economists also expect the unemployment rate to dip to 5.9% from 6.1%. That level would represent a new-pandemic-era low.

Data published Thursday suggests the forecasts could ring true. ADP's monthly employment report showed the US adding 978,000 private payrolls in May, blowing the 674,000-payroll estimate out of the water. The reading marked the strongest month of private-payroll growth since June 2020 and a fifth straight month of job additions.

Separately, weekly filings for unemployment benefits fell to a fifth consecutive pandemic-era low last week as layoffs slowed further. Jobless claims totaled an unadjusted 385,000 for the week that ended Saturday, narrowly beating the median estimate for 388,000 claims. Claims have steadily trended lower throughout May, signaling the labor market's recovery picked up after April's less-than-stellar data.

To be sure, weekly claims counts and ADP's report are also volatile and only loosely tied to the government's nonfarm payrolls data. As seen just one month ago, strong prints from both indicators can still precede an upsetting jobs report.

"It is hard to know what to make of the signal from the ADP report because it has not reliably predicted the BLS data in recent months," Daniel Silver, an economist at JPMorgan, said in a Thursday note. "Declines in initial claims likely reflect improving conditions in the labor market, although other factors could also be at play."

Hiring should improve, but don't get too excited

Experts are finding reasons to temper their expectations for other labor-market signals. Data from the Ultimate Kronos Group and Homebase both show modest increases in hours worked in May, Bank of America economists said last week. The former's shift-work measure rose by just 0.1% between the May and April payroll weeks, compared to the 0.3% decline from the prior period. The reading "could mean a slightly better jobs report but does not suggest a gangbusters print," the team led by Michelle Meyer said.

The Homebase employee working index rose just 1.7% between the May and April survey weeks. That similarly hints at a "soft reading," the bank added.

Other metrics, such as the Conference Board's labor-market differential index and national purchasing managers' indices, suggest hiring improved in May. Still, the BofA economists cautioned against "reading too much" into such information for the "magnitude of hiring," and instead see them as pointing to a general improvement in hiring.

"All told, we see scope for decent gains in employment in May following a disappointing report in April," the team said.

Taper time? Or delay further?

There's a fair deal riding on the Friday report, the bank added. The Federal Reserve has indicated it won't pull back on its ultra-accommodative monetary policy until it sees "substantial further progress" toward maximum employment and above-2% inflation.

The latter condition is already being met, with price growth trending above average as the US reopens. The Friday jobs report, then, is a "critical data point" for the Fed's next steps toward policy normalization, the BofA economists said.

On one hand, a stronger-than-expected report could push the central bank further toward tapering its emergency asset purchases. The Fed has been buying at least $120 billion of Treasurys and mortgage-backed securities each month to support market functioning. Officials have been adamant they don't expect to shrink the purchases in the near-term, yet minutes from the Federal Open Market Committee's April meeting suggested they may soon discuss a plan for eventual tapering.

A strong rebound in employment "could give the Fed more confidence in the recovery and the ability to start guiding markets toward a taper," BofA said.

Conversely, another disappointing report could push tapering further into the future, the economists said. The central bank has made clear that it's willing to maintain its easy monetary policy for as long as needed to support the economic recovery. Any sign of the labor market recovery stagnating would likely entice the Fed to keep rates near zero for as long as needed to promote hiring.