June Employment Report

KEY DATA: Payrolls: +288,000; Private Sector: +262,000; Unemployment Rate: 6.1% (down 0.2 percentage point); Hourly Earnings: +0.2%

IN A NUTSHELL:  “Anyone still doubt that the labor market is strengthening?”

WHAT IT MEANS: After being way out on a very thin limb for months now, saying that the labor market is a lot better than the talking heads would have you believe, we have some pretty convincing evidence that is the case.   Payrolls soared in June and the gains were across the board – 65% of the industries posted increases.  I expected about 250,000 but I made one big mistake: The bad winter meant a lot of schools were open longer than normal, boosting the education jobs.  State and local education payrolls rose by 20,000.  Even adjusting for that artificial rise, which will come out in July, the hiring boom was impressive.   We averaged 272,000 new workers over the past three months and 255,000 private sector positions as both April and May were revised upward.  Manufacturing increases were solid but not spectacular and construction rose less than expected.  But it was in the service-producing component where we really saw the hiring occur.  The only major category was “other services”, which includes repair and maintenance, laundries and membership associations.  In other words, we didn’t take our vehicles to the local shop or get our clothes cleaned.  Horrors!

The strong job gains are helping drive down the unemployment rate, which at 6.1% was the lowest since September 2008.  The labor force grew and the labor force participation rate stayed stable for the third consecutive month, both good news.  The only negative news was a rise in those who could only find part-time work.  But that number is extremely volatile and the change over the year has been pretty stable for a couple of years.  It would be better if the level was declining.  Despite the decline in the number of people unemployed, it is down 2.3 million over the year, wage pressure remain tame.  I still believe that will change in the fall or early winter.

MARKETS AND FED POLICY IMPLICATIONS: It is hard to argue that the labor market remains moribund.  Unemployment claims are low, layoffs, as reported by Challenger, Gray and Christmas, are flat and hiring is picking up.  But the missing link remains wages.  My argument has and still is that businesses still don’t believe they have to bid for workers so they are holding the line for as long as possible.  But the longer they delay, the bigger the retention and attraction problem becomes and when that dam breaks, it could mean a lot faster gains in wages than anyone expects.  By year’s end, we could be fairly close to the full-employment level of about 5.5%.  Does anyone believe that wages remain stable when workers are not available?  I don’t.  And that is the conundrum the Fed faces.  If, after six years of not having to think about compensation, executives are being stubborn about making wage adjustments, the Fed could be find that a key indicator, compensation, is lagging even longer than in the past.  That could cause the FOMC to wait longer than it should to start raising rates.  As for the markets, if slow job growth was good for equities, will strong job gains be worrisome?  Who knows?  But lots more jobs are better than just a few more jobs and the real issue will be interest rates: They are likely to rise a lot faster than expected.