An Important Week for Economic Data

Fed officials have signaled that monetary policy decisions will be data-dependent. Hence, financial market participants will closely examine upcoming economic reports. Data are expected to remain consistent with an improving economy and an initial increase in short-term interest rates by the end of the year.

Job growth has been strong over the last several months. While average monthly gains have slowed in the first half of this year, the pace has remained strong. There’s some statistical uncertainty in the monthly payroll figures (which are reported accurate to ±105,000), but the three-month average helps smooth out the noise. Prior to seasonal adjustment, we normally see sharp gains in payrolls in the spring, and the 2015 figures have been consistent with the usual pattern. However, it’s worth noting that the unadjusted payroll figures are trending three million higher than a year ago.

The unemployment rate ticked up in May, but that is likely to have been noise (the rate is reported accurate to ±0.2%). Since peaking in 2009, the unemployment rate has declined. However, the downtrend overstated the improvement in labor market conditions (as many people exited the labor force). More recently, the employment/population ratio has been trending gradually higher, with gains more pronounced in the key age cohort (those aged 25-54). The pace of job growth and the rise in the employment/population ratio suggest that growth is currently beyond a long-term sustainable rate, as firms will eventually run out of people to hire, but we are still a long way from hitting such constraints.

Average hourly earnings picked up in May, but not by much. Such gains are often revised away in the next month’s report. Investors are likely to pay close attention to the June data, but the May pickup appears to be very tentative. Moreover, wage inflation is still far from what is considered normal (Fed Chair Yellen suggested that a good pace would be 3.5% or more).

Real wages are up considerably from a year ago. However, the boost from lower gasoline prices will fade over time. Real wages have trended roughly flat since January. Motor vehicle sales rose sharply in May. However, part of that gain reflected a bounce-back from a soft April. Moreover, the early Memorial Day holiday led to two weekends of heavy sales promotions. June vehicles sales (to be reported on Wednesday) should show moderation. However, even with a pullback in unit auto sales in June, inflation-adjusted consumer spending (70% of GDP) would still be on track for about a 3.0% annual rate in 2Q15.

Financial market participants typically react to the latest monthly figure, ignoring the fact that there is often a lot of noise in the economic numbers. It’s the underlying trends that are important. While we may see some mix in this week’s data, the June figures on consumer confidence, ISM manufacturing, vehicle sales, and employment should remain consistent with an improving economy, more or less in line with Fed expectations.

© Raymond James

© Raymond James

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