United States

July jobs report gives Fed green light to raise rates


The July employment report increases the likelihood that it’s “go time” for the Federal Reserve to begin policy normalization. The pace, breadth and depth of job creation means the central bank will probably raise the main policy rate by 25 basis points at its Sept. 17 meeting.

The economy generated 215,000 new jobs in July while upward revisions added another 14,000 to the May and June jobs reports. That brought the total change in employment to 229,000 for the report. Perhaps most important for the Fed, the report implied further tightening in the labor market even with the formal U3 unemployment rate holding at 5.3 percent (5.261 percent) and a decline of 180,000 to 6.325 million in involuntary part-time employment. The three-month diffusion index improved to 65.8 from 63.9, indicative of broad and deep hiring across different sectors. That should boost the confidence of any policymakers who may be on the fence about raising rates

One alternative metric of unemployment, the U6 less U3 spread which accounts for those who are marginally attached to the workforce, suggested further narrowing in the labor market. That key spread declined to 5.1 percent, above its historical average of 4.6 percent. This, along with an array of other labor market indicators, implies that the economy will reach full employment during the next several months.

Inside the July data, hiring was clustered in trade and transport, education and health and business services. Goods producing and manufacturing hiring rebounded modestly. Moreover, job gains in construction and business services looked a bit light given the gains in residential construction and service sector data, which suggests the Bureau of Labor Statistics may upwardly revise that data during the next three months.

The quality of jobs created was slightly tilted toward low wage jobs as one would anticipate during the summer months. In July there was 103,000 high-wage jobs versus 107,000 low-wage jobs created. Since the labor market decisively turned in January 2014 there have been 2.317 million high-wage jobs created versus 2.175 million low-wage jobs which, in part is, responsible for the 3 percent pace of household spending during that time.

Average hourly earnings increased 0.2 percent on the month and are up 2.1 percent on a year-ago basis. Aggregate hours worked increased 0.5 percent on the month and are up 2 percent on a three-month annualized pace. With the economy growing modestly above trend, and the labor market narrowing, conditions are ripe for a pickup in private sector wages and salaries in the second half of the year.

Read the August issue of The Real Economy, McGladrey’s monthly publication focusing on economic trends affecting the middle market.

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