There was a lot of important information on the U.S. economy released this week, but the biggest data point is without a doubt the latest monthly job report from the Bureau of Labor Statistics (BLS) out this morning. Indeed, total nonfarm employment in America rose by 224K payrolls in June, the 105th consecutive month of net job growth and significantly better than anticipated. There was a net downward revision of 11K payrolls to the April and May reports, but the less-volatile 3-month average job gain still climbed to 171K. That is the best reading since March and supports our earlier argument that May’s sudden collapse in job creation was due more to the brief escalation in the trade war than a broader contraction in the overall economy. Further, weakness remains more pronounced in the goods-producing sector, which has a greater direct exposure to tariffs, foreign exchange risk, and general economic uncertainty overseas.
Employment growth, though, has slowed over the past year. This is consistent with the gradual decline in job creation we suggested should occur following 2018’s above-trend pace of hiring. Put simply, the monthly gains of 250K or more payrolls should become increasingly rare or else there is a lot more slack left in the labor market than previously believed. Labor force participation improved in June as the favorable conditions attracted people back into the labor market, and the rate of unemployment ticked higher due to the increase in job seekers (reentrants). Moreover, the rise in participation over the past few years has increased the labor supply and in turn helped explain why wage growth has been muted and the decline in joblessness has slowed despite steady hiring. Although average hourly earnings disappointed forecasts in June, annual wage growth overall is near the high-end of the range for this cycle and an acceleration should occur as labor conditions continue to tighten. Income gains have been especially strong among production (non-managerial) workers and in typically low-wage industries recently, which bodes well for consumer spending, the largest component of U.S. GDP, since consumption behavior for lower-income Americans is more sensitive to changes in earnings. Although this solid job report is just one data point, it will likely make it harder for officials at the Federal Reserve to justify being as dovish at the upcoming FOMC meeting as the market had been pricing in.
Sources: Econoday, U.S. DoL, FRBSL
Post author: Charles Couch