The June jobs report reversed some of the disappointment in May as headline job growth of 224,000 easily beat the 160,000 expectation. Offsetting some of that warm glow, however, the prior two months were revised lower by 11,000 jobs and wage gains disappointed. For the month wages increased 0.2% missing the 0.3% forecast and the YoY gain remained at 3.1% missing the 3.2% pre-release forecast. YoY wage gains were steadily increasing throughout last year giving the Fed reason to believe the much anticipated acceleration in wages was occurring. However, wages seem to be plateauing just above 3.0% of late. In addition, the unemployment rate crept higher to 3.7% after sitting at 3.6% for three straight months—the low for this cycle. In summary, while the headline beat removes any thoughts of a 50bps rate cut later this month, the modest wage gains could still allow the Fed to go ahead with a 25bps rate cut. With the market pricing in nearly 75bps of cuts by year-end this report the Fed could cut 25bps this month and follow it with similar cuts in September and December if inflation and wage growth remain docile and “uncertainties” remain in the outlook.
For the month, 224,000 jobs were created which easily exceeded the 160,000 forecast and represents a solid rebound after the disappointing May print. The prior two months were revised down 11,000 dimming some of the positives of the headline beat in the June report. Over the past year, monthly job gains averaged 192,000 so the June results reflect not only a rebound off the May number but a beat of the annual average.
Away from the headline job growth numbers, and probably more important, wage gains disappointed versus the month-over-month and yearly expectations. Average hourly earnings rose 0.2% for the month versus 0.3% expected, while year-over-year earnings rose 3.1%, missing the 3.2% forecast and that matches May as the lowest YoY print since September’s 3.0% rate. February’s 3.4% YoY gain remains the high for this cycle. Despite a rebound in job growth numbers recent wage gains remain modest and that probably gives the Fed a green light to start cutting rates beginning with the July 31 FOMC meeting.
Meanwhile, the unemployment rate rose from 3.6% to 3.7% (actually 3.666% vs. 3.620% in May) exceeding the pre-release 3.6% forecast. The Household Survey—which is used to generate the various employment ratios— saw an 87,000 person increase in the ranks of the unemployed (5.975 million versus 5.888 million) and an increase of 335,000 in the labor force (162,981 million vs. 162,646 million). The net of all this increases the unemployment rate by 4bps but that is enough to increase the reported number from 3.6% to 3.7%. The increase in the labor force will hearten the Fed, and given still docile wage gains, the Fed’s latest 4.2% equilibrium estimate of unemployment will need to be cut again to something closer to the current 3.7% rate when they refresh the estimates at the September FOMC meeting.
Following the uptick in the unemployment rate the broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) rose to 7.2% after resting at 7.1% for the two previous months. The 7.1% remains the low for this cycle. As mentioned, unemployed persons increased by 87,000, while part-time workers decreased by 8,000 but 176,000 were added to the ranks of the marginally attached (those willing to work but not actively looking). The higher numerator was met with a slightly larger denominator as the labor force increased by 335,000 but that wasn’t enough to stop the underemployment rate from ticking up to 7.2%.
The labor force participation rate (labor force divided by civilian population) rose to 62.9% after resting at 62.8% for three straight months but remains off the cycle high of 63.2% set back in February. The one-tenth increase was driven by the aforementioned 335,000 increase in the labor force while the civilian population rose by a lesser 176,000. While the current rate is fairly close to the cycle high, the rate still pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.2% range over the past year appears to be the new full employment normal given the aging of the working population and slowing population gains.
In summary, this release reverses the disappointing May report with the headline number beating expectations and exceeding the twelve-month average. However, wage gains seem to have plateaued after increasing earlier in the year and that fact still gives the Fed the option to cut later this month. With the market pricing in nearly 75bps of rate cuts by year-end the only question was the Fed begin with a 25bps cut or jump to 50bps? The strength in the job growth numbers forecloses thoughts of a 50bps cut; thus, we see 25bps as a more likely response with a possible follow-on in September and December which would bring them to the 75bps in cuts expected by the market this year.
Average Hourly Earnings Trending Lower
Average hourly earnings and the unemployment rate have been the most important metrics in the monthly jobs report for some time. Despite the unemployment rate being well below the Fed’s long-run equilibrium rate of 4.2%, wage gains rose 0.2% in June while the YoY print was 3.1%, both results missed pre-release expectations. The graph shows the unemployment rate along with the YoY wage gains dating back to 2007. While YoY wage gains have slowly improved since 2012, they have been trending lower over the last few months, despite the unemployment rate near a cycle low. The docile wage gains, along with modest inflation give the Fed room to begin easing rates later this month.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||2.22%||+0.09%||1 Mo LIBOR||2.36%||-0.04%||FF Target Rate||2.25%-2.50%||3 Year||1.820%|
|6 Month||2.12%||+0.02%||3 Mo LIBOR||2.29%||-0.04%||Prime Rate||5.50%||5 Year||1.811%|
|2 Year||1.85%||+0.09%||6 Mo LIBOR||2.21%||+0.01%||IOER||2.35%||10 Year||1.986%|
|10 Year||2.03%||+0.01%||12 MO LIBOR||2.18%||UNCH||SOFR||2.56%|