United States

Few fireworks in June jobs report


It wasn’t exactly a star-spangled jobs report, but it will do as labor slack continues to diminish. Total employment expanded by 223,000 in June, just below our forecast of 225,000. The unemployment rate fell to 5.3 percent, in line with our expectation as the number of individuals entering the workforce slowed.

With construction, business services and financial sector employment likely to accelerate in coming months, we expect a strong close to hiring in the second half of the year. Meanwhile, our preferred metric of unemployment, the U6 less U3 measure, fell to 5.2 percent, which is above its historical average of 4.6 percent. We anticipate the labor market will continue to create jobs between 225,000 and 250,000 per month on average throughout the remainder of the year, in line with our annual forecast.

For policymakers at the central bank, this jobs report did little to move the needle. The Federal Reserve is still on track to increase rates by 25 basis points at the September meeting with possibly an additional 25 basis-point rate increase at the December meeting. Federal Reserve Chair Janet Yellen is likely keeping a close on the labor market as it rapidly approaches full employment (5.2 percent). Given rising wages, a drop in those employed part-time for economic reasons, inflation trending upward, and a Fed balance sheet of $4.5 trillion, the Fed must be seriously considering the appropriateness of its zero-interest rate policy with an economy that is likely to grow above-trend during the final three quarters of 2015.

While there was a 60,000 job in downward revision to the payroll estimates in April and May, most of it was clustered in government hiring so the underlying trend in private job creation in the first six months of the year remains stout at 217,000, slightly slower than the 234,000 pace seen last year. The three-month diffusion index, which tracks the breadth and depth of hiring, improved slightly to 68.5 from 63.9 in May, as one would expect given the downward revisions in government hiring.

There appeared to be some seasonal adjustment issues in this report with government hiring flat due to state and local educational calendars. More surprising was the softness in weather-related categories, construction hiring and leisure and hospitality excluding restaurants. Apart from those categories, the hiring trends in trade and transport, retail, financial, business services, education and health and information all remained intact. The economy created 131,700 low-wage jobs in June and 85,900 high-wage jobs. Since the economy began accelerating in January 2014, about 2.199 million high-wage jobs have been created versus 2.073 million low-wage jobs.

Average hourly earnings were flat in June, compared with the 2.8 percent increase in wages and salaries seen inside the employment cost index (ECI). Be aware, policymakers at the Federal Reserve look more closely at the ECI than they do hourly earnings inside the monthly Bureau of Labor Statistics (BLS) estimate. In our estimation, the quality of the estimate in the ECI is far superior to that in the monthly BLS headcount, and this is why we are sticking with our call on the Fed and interest rates.

Source: McGladrey, BLS

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