WASHINGTON (AFX) - The US unemployment rate is still expected to rise to 5 pct on the back of the sharp slowdown in the economy, despite the apparent stability registered in July, said Robert McGee, chief economist at Tokai Bank in New York.
The July employment report "basically shows there's not too much significant improvement," with the decline in non-farm payrolls "close to the average of recent months," McGee said.
He forecast the unemployment rate would rise to 5 pct "early next year."
The Labor Department earlier reported that non-farm payrolls dropped a lower than expected 42,000 in July, while the unemployment rate held steady at 4.5 pct.
McGee cautioned that the private sector lost more jobs than the headline figures would suggest, as government job creation helped to support the labor market.
The report supports forecasts for a 25 basis point Federal Reserve rate cut at the next scheduled policy meeting on Aug 21, he said. McGee said that labor market indicators in general are a lagging indicator, and pointed to other signs that a rebound in economic activity is likely in the second half.
He noted that 40 bln usd in tax rebates currently being distributed by the federal government are "showing early signs that the tax cut will have a higher effect than anticipated."
In the Conference Board's most recent Consumer Confidence survey, respondents raised their plans for consumption over the next six months.
"This was likely the result of receiving notifications about their tax rebates," which were mailed out in July, he explained. Therefore, the expected further deterioration in the unemployment rate should not be a worrying forward-looking sign, he concluded.