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June Payrolls: Silver, Not Gold
Friday, Jul 06, 2018

Financial markets declared the June jobs report to be a "Goldilocks" one and promptly returned to their summer slumber, troubled only by fears of escalating trade conflict. That label is only a minor exaggeration. From a trader's perspective, this jobs report didn't leave much to be desired, although it wasn't quite as strong as most people declared.

Sure, the headlines were all encouraging, with payroll growth strong and unemployment rising due to higher labor force participation. Yet a large portion of the increase in participation came from an upward revision in the long-term unemployed – people who have been off the sidelines and searching for a while. That said, with involuntary part-time work declining by a substantial 205k and wage growth interminably sclerotic, the basic portrait of a labor market with lingering slack and responding well to fiscal stimulus seems intact. As a possibly last clean read on domestic strength before trade tensions take a toll on sentiment, it was a fitting snapshot of the U.S. job market.

The Highlights:

  • Nonfarm payrolls rose by 213k. Net upward revisions of 37,000 to the prior two months brought the 3-month average to 211k from a previously reported 179k.
  • The “U3” unemployment rate retraced to 4.0% from 3.8%, as labor force participation rebounded as well.
  • At 2.7% over 12 months, growth in average hourly earnings remained disappointingly steady in the face of rising consumer prices.

The Rundown:

  • No sign of trade impact yet; plenty of signs of fiscal stimulus: Aside from the headline number, manufacturing payrolls rose a very robust 36k, and its few areas of weakness were in electronics, furniture, and miscellaneous categories. In a sign of resilient business confidence, temporary payrolls were up (9.3k vs. -4.7k prior), as were the stalwart sectors of education/healthcare (54k vs. 40k)) and professional/business services (50k vs. 43k). The employment diffusion index held on at a robust 65.5%, a bit below May's blistering 69.8%, but above April's more-than-strong-enough 62.4%. It bears recalling that 213k is more than twice what most economists think is necessary to keep the unemployment rate falling.
  • The retail rebound was premature: Retail payrolls declined (-21.6k), almost fully reversing the downwardly revised May rebound of 25.1k. Most of the declines within retail payrolls were reversals of the prior month’s areas of strength, notably general merchandise stores (-21.5k), but food and beverage stores were off too (-8.6k).
  • Signs of slack once again, as well as efforts by employers to dig deeper for talent. While most demographic groups saw their unemployment rates rise along with the headline, the teenager and Hispanic/Latino categories still saw declines (-0.2 and -0.3 percentage points, respectively). While it was encouraging to see a substantial rise (204k) in reentrants to the labor market, a lot of this seems related to an upward revision to estimates of people who have been looking for a job for over 6 months, rather than discouraged workers suddenly coming off the sidelines and starting new job searches. The ranks of the long-term unemployed (27 weeks or longer) jumped 289k. Also, it was less than encouraging to see job losers rise (211k), job leavers fall (-41k), and new entrants eke out a rise of only 7k. It's no fun to say it, but some of this speaks to the inherent noisiness of the household survey.
  • One more sign of slack: despite the decline in involuntary part-time work mentioned above, the "U-6" underemployment rate rose in line with unemployment (to 7.8% from 7.6%). If these kinds of dynamics continue, we may see the unemployment rate level off sooner than later, which is what the Fed has generally predicted (incorrectly) for a while now.
  • Wage growth would have been a big disappointment, if most job market watchers hadn't already been conditioned to half-expect disappointment. Some prior months were revised higher, but not enough to move the needle. As with leveling off in the unemployment rate and slowing in payroll growth, we won't know it's happening until it happens, since most predictions so far have been off. Also of note: wage growth was particularly weak in the transportation/warehousing sector, despite widespread reports of a labor shortage for truckers. Aside from perhaps being a cautionary tale in reading too much into one month's data, this is also a reminder that markets for labor are not much like consumer product markets.

The Outlook:

  • Fed on pace with 4th hike optionality: A report this strong supports the Fed’s plan for two more rate hikes this year. With market expectations roughly 50/50 for a 4th hike in December, the Fed has all the optionality it needs to pick through upcoming growth and inflation data to see whether, when, and how trade tensions undermine stimulus-juiced domestic momentum. Meantime, they have time to debate the neutral rate and future path of policy, as well as their balance sheet and operational framework.
  • In short: all eyes facing forward, especially at business sentiment and jobless claims, but also plenty to listen for in policy makers' speeches.

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