Goldilocks Jobs Report Keeps Bid in Treasuries

Jul 06, 2018

The June Employment Report beat on the headline jobs growth number (213,000 vs. 195,000 expected) but the headline beat was softened by an increase in the unemployment rate (4.0%) and a miss on expected wage gains.  On a year-over-year basis wage growth increased 2.7% vs. 2.8% expected and continues to remain well shy of the 3.0%-3.5% pre-crisis levels. The unemployment  rate rose from a cycle low of 3.8% to 4.0% after the labor force suddenly increased by 601,000 people with most of them (499,000) adding to the unemployment roles. The uptick, because it stemmed mostly from discouraged workers moving back to the labor force, won’t be viewed negatively by the Fed and it indicates we’re still shy of full employment.  In summary, this is another solid jobs report that keeps the Fed confident they are not overtightening, at least not yet, In fact, the limiting factor to future hikes this year will be the impact of trade actions and retaliations and the subsequent hit to confidence and economic growth. For now, however, this report will keep the Fed on its planned quarterly hiking schedule but expect some dovish Fed members to note the unemployment rate increase as an indication we’re still shy of full employment and perhaps a pause is warranted.

 

  Economic News

 

For the month, 213,000 jobs were created beating the 195,000 expected, but below the 244,000 jobs created in May (upwardly revised from 223,000).  With the government sector subtracting 11,000 jobs, private payrolls increased by 202,000 versus 190,000 expected and 239,000 in May (revised up from 218,000).  Two-month revisions added a net of 37,000 new jobs from prior prints. Digging into the categories, 149,000 service-providing jobs were added during the month versus 188,000 in May. Gains were led by education and health services (+54k) with professional and business services +(50k) and leisure and hospitality (+25k) the other leading service categories.  Retail trade lost -22k this month compared to a gain of +25k in May accounting for the softer service jobs number in June. Meanwhile, 53,000 goods-producing jobs were added versus 51,000 in May with manufacturing (+36k) and construction (+13k) leading the gains.

 

Wages followed a solid increase in May with additional gains in June but both the monthly and year-over-year print missed expectations as the labor market refuses to open its purse strings wider despite the consistent addition of 200,000 new jobs monthly. Average hourly earnings for June increased 0.2%, missing the 0.3% expectation and  also behind the 0.3% gain in May.  In addition, year-over-year earnings missed by matching the May print of 2.7% but off the 2.8% that was expected.   In addition, the YoY wage gains are still shy of the 3.0% to 3.5% pre-recession annual rate. The Fed, and workers, want to see the wage gains move back to that pre-recession rate before concluding the labor market is truly at full employment.  Average weekly hours remained unchanged from March at 34.5 hours.

 

The unemployment rate rose 2/10ths to 4.0% (4.048% to be exact) after setting a new cycle low of 3.8% in May and missing the 3.8% expected. The  rate increase stems from a huge increase in the labor force of 601,000 with 499,000  of those added to the ranks of the unemployed. The big labor force gain reverses some drops in prior months and could indicate previously discouraged workers (and uncounted in the labor force) have decided to resume the search for a job. The labor force increase adds additional fodder to those saying the labor market is still below full employment and that is also illustrated in the meager wage gains. Expect the Fed doves to hit on this point in wanting to temper the pace of hikes.

 

The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) also rose 2/10ths to 7.8% after setting a new cycle low of 7.6% in May.  With the labor force increase (which is the denominator in the underemployment rate) the rising rate was due mostly to an increase of 499,000 in the ranks of the unemployed, partially offset by a decrease of 205,000 in part-time workers and a decrease of 18,000 in the ranks of the marginally attached (those willing to work but not actively looking). This rate bottomed in the 7.9% - 8.2% range prior to the recession.

 

The labor force participation rate (labor force divided by civilian population) rose to 62.9% as the 601,000 gain in the labor force increased more than the 188,000 civilian population gain.  As we’ve said previously, despite the 2/10ths gain in June, the current reading pales in comparison to the 66% level that prevailed pre-crisis. On the face of that it may seem to indicate some remaining labor force slack but getting anywhere close to that pre-crisis level seems almost impossible given demographic forces of increasing boomer retirements, versus modest population gains. The 62.7% to 63.0% participation rate range may well be the new full employment normal given the aging of the population.

 

In summary, this is another in a string of solid job reports that will keep the Fed confident they are not overtightening, at least not yet, In fact, the limiting factor to future rate hikes this year may be more the impact of trade actions, and retaliations and the subsequent hit to confidence and economic growth. For now, however, this report and most other releases of late, will keep the Fed on its planned quarterly hiking schedule but expect some dovish Fed members to note the unemployment rate increase as an indication we’re still shy of full employment and perhaps a pause is warranted.

 

 

 

Market Update  Average Hourly Earnings YoY

 

Average hourly earnings has become perhaps the most important metric in the monthly employment reports. With the unemployment rate lifting off the cycle-low of 3.8% to 4.0% wage gains rose 0.2% missing the May and expected gain of 0.3%. The graph shows the trend in YoY earnings for non-supervisory workers dating back to the mid-60’s. As shown, the current wage gains, while improving, pale in comparison to prior periods with the average over the 50-year period at 4.2%. The modest wage gains, and certainly the uptick in the unemployment rate will keep inflation from ramping materially higher, especially with the Fed adopting a more aggressive hiking schedule.

 

Average Hourly Earnings YoY

 

 

Agency Indications  Market Rates

 

Market Rates

 

 

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