Good, but Not Too Good

The June Employment Report was about as much as stock market participants could have hoped for. Nonfarm payrolls rose more than expected, helping to offset fears that the economy is weakening. However, job growth was not too strong and wage inflation remained moderate, reducing fears that the Fed might be forced to raise short-term interest rates more aggressively. If this moderate-growth backdrop sounds familiar, that’s because we’ve lived with it for some time now, and that’s been a relatively good environment for investors.

Nonfarm payrolls rose by 222,000 in June, more than anticipated, with a net revision of +47,000 to April and May. The June surprise was partly due to a 35,000 gain in government jobs (mostly local, and surprisingly, not education). Note that, prior to seasonal adjustment, the economy lost 952,000 education jobs (public and private-sector) in June and added 1.551 million non-education jobs – roughly in line with what we saw in June 2016. Private-sector (adjusted) payrolls rose by 187,000, not far from the median forecast (+172,000), leaving the first-half average at +171,000 (vs. a +170,000 average for all of 2016). Retail payrolls rose by a lackluster 8,100, but that followed four consecutive months of declines (up 0.1% y/y).

We need less than 100,000 payrolls gains per month to be consistent with the growth in the working-age population. We can run higher than that now because we are still working off the slack created during the Great Recession. How much slack remains in the job market is difficult to determine, as demographic changes (an aging population) have reduced labor force participation. As the job market picks up, we normally see individuals come back into the labor force, but that ought to be limited (again, due to the demographics). The degree of underemployment is also difficult to gauge. Involuntary part-time unemployment has been trending lower.

Tighter job market conditions should eventually lead to higher wage inflation. Average hourly earnings are now trending at 2.5% year-over-year – good, but not especially strong, and somewhat surprising given the low unemployment rate (4.4%). That could be due to better job growth in lower-paying industries. The AHE figure is subject to shifts in the composition of jobs, but the Employment Cost Index (2Q data due July 28) is not. As expected, 2Q17-over-2Q16 wage growth is elevated in the information sector and weak in the retail sector, but mixed otherwise (what’s up with leisure and hospitality?).

There are a number of possible explanations for why wage growth has been limited. Firms continue to emphasize cost containment and aren’t giving away wage hikes much beyond consumer price inflation, unless the employee has one foot out the door. Workers may be accepting lower salary increases to keep their health insurance. The Fed believe that wage growth may have been held down by the weak pace of productivity growth. Whatever the case, the near-term economic backdrop remains favorable: continued growth, but not too strong.


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