NEW YORK (CNN/Money) - Fluke or an early warning sign of economic weakness: Friday morning's much anticipated July employment report will tell investors a lot about what's ahead, as well as how to think about June's disappointing reading on new jobs.
The jobs report last month was a shocker: Just 112,000 jobs were created in June, after three months of strong growth north of 235,000. That's why there's a lot riding on Friday's number.
If more than 200,000 jobs were added, then it will be seen as an indication that the June reading wasn't a big deal, that the economy is on pace for a strong second half, that consumer spending is likely to pick up, and that the Federal Reserve will continue with its stated policy of raising interest rates.
Less than that, and the report will raise new fears that the economic recovery is weaker than expected only a few weeks ago, and that there should be more attention given to other weak economic reports, including the weak retail sales report for June.
If that happens, stocks are likely to take a hit and bond prices are likely to soar on expectations that the Fed will show restraint.
Looking for the trend
Economists are mostly in camp that the June weakness was a fluke. The survey of 24 economists by Reuters found the lowest job growth estimate at 200,000, the highest at 300,000, and a median estimate of 228,000.
The unemployment rate is expected to stay unchanged at 5.6 percent.
"If you look at labor demand, you should be getting a decent trend. It was only June data that fell below that trend," said Steven Wieting, senior economist at Citigroup, which is forecasting a 300,000 job increase.
"Summer months can be particularly hazardous for forecasters," said a note from Wachovia Securities Chief Economist John Silvia. "The timing of the end of the school year, seasonal hiring patterns and even weather can distort the monthly figure."
Silvia noted that wet weather that hit construction hiring and the fact that the employment survey was done during the week of President Ronald Reagan's funeral unduly lowered hours worked.
"The net result is that June's (report) likely grossly understates the economy's underlying momentum," he said, forecasting a 280,000 jobs gain.
But some other economists aren't convinced. They point to surveys of employers, especially non-goods producing employers, by the Institute of Supply Management, which showed a drop in hiring activity. They say even during the three month surge in hiring, the trend was clearly down from the high of 353,000 jobs added in March.
Robert Brusca of FAO-Economics is forecasting only 140,000 new jobs, pointing to weakness in recent indicators, including the ISM survey, the help wanted ad index and other raw materials.
Brusca said that the higher forecasts are based on the previous three-month average, which is 224,000 new jobs, as well as the general belief that economy is getting better. "No employment indicators we have suggest the number should be that big," he said speaking about the consensus forecast. "They've convinced themselves that March, April and May are the right numbers. "My view is the previous months were the aberrant month, and June makes more sense."
But even Brusca doesn't expect a weak job number Friday to derail the Federal Reserve's intention to raise interest rates by a quarter of a percentage point at its Aug. 10 meeting.
And on that point he agrees with some of the employment bulls.
"It's very unlikely for Fed to worry about month to month data changes, or even two months, as the markets do," said Wieting.
A weak July employment report would definitely put future rate hikes much more in doubt though. Conversely, a strong number would convince investors that they could stop worrying about recent weak reports and start worrying about higher rates once again. That's why bond and equity markets are likely to respond dramatically and immediately to July's number Friday morning.