A Good Day for the Cooler Heads
Friday, Jul 08, 2016

The strong rebound in job growth shows that pre-Brexit momentum was strong in the U.S. labor market, putting the possibility of a rate hike by the Federal Reserve later this year back on the table. June was strong across the board just as much as May was weak across the board – a vindication for those who viewed the exceptionally weak May report as an anomaly.

The Bureau of Labor Statistics reported 287,000 jobs were added last month – a rebound from May, when net job growth totaled just 11,000. The revisions to prior months roughly canceled out, with May marked down from 38,000 and April marked up to 144,000 from 123,000.

The weak May jobs number now looks like it was just noise. Even in an economic expansion, you sometimes see the occasional month of outright jobs losses. Before the May report, many analysts had been noting how unusually steady job growth had been over the last few years – 68 straight months of gains at that point – so we were probably overdue for an off month. If you look past the monthly volatility by taking the 3-month average, you get job growth of about 150,000 a month. That’s a modest slowdown from the gains of over 200,000 a month seen in 2015 and consistent with the idea that the U.S. is reaching a more stable phase of the business cycle.

The June report’s broad-based about-face means the industry breakdown is less revealing than a broader measure. The diffusion index measures the proportion of industries with increasing or stable employment and a level of 50 percent indicates an equal balance between industries with increasing and decreasing employment. In June this index jumped from 48.1 percent to 62.4 percent. The goods-producing sectors continue to lag, posting a net gain of just 9,000 as minor losses in mining and logging partially offset some gains in manufacturing (14,000) and construction was flat. Private service-providing employment rose 256,000 as every major category expanded except transportation and warehousing. Temporary services – often seen as a forward-looking indicator – posted a respectable gain of 15,200 and government had an outsized gain of 22,000.

Turning to the household sector, the rosy hues were applied with a similarly broad brush. The unemployment rate ticked up 0.2 percentage points to 4.9 percent, but this was due in part to an uptick in labor force participation to 62.7 percent. Pulling more people back into the labor force has been a key objective of the Yellen Fed, and it is a minor sweetener that this decreases the likelihood of the Fed having to revise its year-end projection for unemployment to be 4.7 percent. The U.S. only needs to add about 70,000 to 100,000 jobs a month to keep the unemployment rate declining.

Similarly encouraging was the large decline (587,000) in people who were forced to settle for part-time work. However, most of this decline merely reverses the large uptick from May. In the bigger picture, “involuntary part-time work” remains elevated, and while we are seeing some progress, concerns about the quality of new jobs are going to persist. Relative to the unemployment rate, the so-called underemployment rate remains about one percentage point higher than one would have expected in the pre-crisis “old normal” period.

Average hourly earnings are up 2.6% relative to a year ago – a new post-crisis high – but this looks less impressive when you consider that it is calculated relative to June 2015's weak wage figures. Wage growth remains at the top of its post-crisis range, but still below the 3-4 percent range that was normal in the pre-crisis era. With the inflation outlook firming and inflation expectations hanging in there, this will keep the Fed warily scanning the horizon, debating the lags on monetary policy and the impact of post-Brexit dollar strength.

In its recent communications, the Fed has emphasized its concerns about the May jobs report and the Brexit vote. The June report largely erases the first concern, so unless we start seeing some direct effects from the Brexit on the U.S. outlook for inflation or growth, the Fed is likely to start talking up the possibility of a rate hike. Unsurprisingly, futures markets quickly raised their estimation of the likelihood of a Fed hike in December, but at first September barely budged. Fair enough: without a really clear signal from the economic data, the Fed may not be eager to stick its neck out during a tumultuous election season. Whether policy makers think the market has moved enough relative to December remains to be seen, but they are unlikely to be in a rush to show their cards.

about the author

As chief economist at iCIMS, an industry-leading provider of talent acquisition software, Josh Wright leads a team of data scientists in analyzing emerging trends in the U.S. labor market