KEY DATA: Payrolls: +224,000; Private: 191,000; Health Care: +35,000; Manufacturing: +17,000; Unemployment Rate: 3.7% (up 0.1 percentage point); Wages: +0.2%; Over-Year: +3.1%
IN A NUTSHELL: “When you smooth out the wild swings in job gains, it is clear the economy and the labor markets remain solid.”
WHAT IT MEANS: It looks like there is lots of noise not just on Twitter. The economic data continue to show lots of volatility as well. After a truly weak May employment report, questions were being raised about the strength of the economy. Never mind. Conditions are just fine. Job growth was strong in June and the increase was across the board. The health care and professional services were the key drivers of the job gains. Despite all the trade problems, manufacturers added lots of workers, a real surprise. But the wild card in this report was government, which added workers heavily after having reduced payrolls in May. Look for that to unwind in July. Similarly, there was a sharp increase in construction, a sector that was largely flat the previous two months.
As for the unemployment rate, it rose modestly. The strong labor market is drawing in more workers and the labor force was up as was the participation rate, so don’t read anything into the increase. The one major concern in this report was wages. Despite the low unemployment rate, wage gains continue to decelerate. I seem to write that every month, as this is a trend that has been with us since the increase over the year peaked in February. And, as I like to point out, without strong income increases, it is hard to sustain solid consumer spending.
MARKETS AND FED POLICY IMPLICATIONS: This was a solid report that creates issues for both the Fed and investors. For the Fed, the members now need to have some weak economic numbers to honestly argue that the economy needs help. I have warned countless times that you cannot read much into any one economic number. But apparently, Fed Chair Powell doesn’t agree. Too bad, since we are seeing just how volatile the data can be. All this talk about the need to cut rates to help the economy simply got no support in June. Job growth was solid and while vehicle sales may have been down a bit from the robust May pace, they were still very solid. The consumer has not abandoned hope. There are a lot of reports that will come out before the next FOMC meeting at the end of the month, but the big one will likely be second quarter GDP. It could be the weakest in three years. But that would not necessarily mean the economy is falling apart enough for the Fed to actually start cutting rates. We often get a number well above or below the underlying trend and this is likely to be the case. It has to do with the volatility of the data. But Mr. Powell needs a soft growth rate to make the excuse to cut rates, since he seems to be operating on a “what have you done for me lately” approach. The Fed looks like it is operating in an economic intelligence vacuum. We have a Fed Chair who wobbles with every economic number. We have a Fed bank president who wants to take out some insurance by cutting rates a quarter point, which would do absolutely nothing to the economy. We have a whole group of members who change their view of conditions between every meeting. And we have investors, who root for weak numbers so the Fed will cut rates, rather than hope for strong numbers that show growth remains solid. Indeed, there seems to be a perverse view that good is bad and bad is good. Strong data raise questions about Fed cuts while weak ones confirm the beliefs that a reduction is coming. Really? Is it better to have a soft economy and rate cuts than a strong economy and no rate cuts? That makes no sense to me, as implies the Fed can fine-tune the economy. The only thing a rate cut would do is sustain the Fed’s role as drug supplier to the equity markets. But since it appears that Fed Chair Powell likes being a pusher and investors like being junkies, I suspect both roles will be sustained at the end of the month.