June Employment Report

KEY DATA: Payrolls: +222,000; Private: 187,000; Revisions: +47,000; Unemployment Rate: 4.4% (up 0.1 percentage point); Wages: +0.2%

IN A NUTSHELL: “Strong job gains, rising labor force and moderating increasing wages: What more could we want?”

WHAT IT MEANS: Well, wrong again. I didn’t think the economy had it in it, but apparently there are still enough “qualified” people looking for jobs to hire an awful lot of new employees. The June payroll increase was well above expectations, though much of that overshoot was due to a huge increase in local government employment. Consensus was for almost 180,000 private sector jobs, so the 187,000 June gain was not that different from expectations. That said, it was a really good report. Looking at the details, just about every major industry added workers, with both the goods producing and service sectors up. Strong hiring was seen in construction, wholesale trade, finance and real estate, health care and restaurants. In addition, job gains in the previous two months were revised up, adding to the belief that we should watch what employers do, not what they say.

The improvement in the labor market is pulling people back into the job search process. The labor force expanded, as did the labor force participation rate. The participation rate has been largely stable for the past 3.5 years. However, even with a lot of people finding positions, the unemployment rate ticked up. Not to be too technical, but the rate now stands at 4.36%, which was rounded up to 4.4%, so let’s not get too worried about the rise in the rate.

As for the numbers I was most interesting, wages and hours worked, there was some good news and bad news in the data. Weekly hours worked were up sharply as firms are working their employees longer. Wages rose less than expected. Over the year, hourly wages are up only 2.5% before adjusting for inflation. Worker spending power is growing by less than 1%, which makes it hard for people to spend a lot more money.

MARKETS AND FED POLICY IMPLICATIONS: This was a good report. Lots of people found work, wages were up and hours worked increased. We can nit pick about the details, which weren’t nearly as great as the headline number, but there is no escaping the fact that employer complaints notwithstanding, firms are hiring. And that is the key for the Fed. This report tells the FOMC members that rate hikes are not slowing things down. Second quarter growth should be between 2.5% and 3%, barring a large, unintended increase in inventories. That would put first quarter growth at about a 2.25% annualized pace, right on target. Thus, there is no reason to slow the normalization process. Keep in mind, normalization means both rate hikes and balance sheet reductions. If the data keep showing that the economy is moving forward, the Fed is likely to raise rates at least one more time this year and also start cutting its holdings by the end of the year. But growth would have to be solid to have both to happen.   One quarter of 3% or more GDP growth doesn’t mean much unless it is backed up by additional strong increases. For investors, the data are a conundrum. While the labor market data imply the Fed will tighten further, more jobs imply the economy is in good shape.   Balancing the two will determine the direction of the markets.