INDICATOR: June Employment Report
KEY DATA: Payrolls: +195,000; Private Sector: +202,000/Unemployment Rate: 7.6% (unchanged)
IN A NUTSHELL: “Businesses are hiring solidly and if they keep it up, it will be only a matter of time before the unemployment rate starts coming down consistently.”
WHAT IT MEANS: So much for the weak labor market. The economy added jobs at a solid pace in June and April and May were revised upward as well. Over the past three months, the private sector has added jobs at a 200,000 pace. This is the level that we need to hit and exceed consistently if the unemployment rate is to come down almost every month. The gains were largely across the board. Leading the way was leisure and hospitality. Apparently, people are eating out again like crazy. Restaurants accounted for nearly thirty percent of the total increase. That makes me a little less irrationally exuberant about the top-line number. A solid rise in construction indicates that the housing boom is continuing to add to payrolls. There were other reasons to be happy with this report. Importantly, wages rose strongly so personal income should be up solidly. Other the other hand, there were continued cut backs in public education and a drop in manufacturing. Also, slack business conditions led to a jump in the people working part-time. While that is not good to see, at least businesses are hiring. Keep in mind, the number of people working part-time because that is the only type of position they could find fell. The issue of part-time is important because those jobs don’t create as much income and the workers are still considered employed. That helps explain what is happening with the unemployment rate. It remained at 7.6% despite a rise in the labor force and the participation rate. People are coming back into the workforce and finding jobs, but many of them are part-time.
MARKETS AND FED POLICY IMPLICATIONS: This is a great report as it shows how solid the economy is despite the problems it faces. The jobs gain may have surprised many but as I commented on Wednesday, the claims numbers have been pointing to payroll increases in the 175,000 to 200,000 range. We appear to be at the top of that range. Will hiring accelerate? That is not clear as we still face issues with sequestration, Europe and Asia. Also, despite all the oil and natural gas coming from shale, oil prices continue to rise. Higher energy costs are not a positive for growth. Regardless, this report will likely be viewed as providing cover for the Fed to actually start ending QE. The reality is that the markets have already provided that cover. Since May 1st, the 10-year note has risen over one full percentage point. The markets have made the move in expectation of the Fed pulling its support so there is little cost if the Fed actually does it. If the large jump in rates slows things down, there is little the Fed can do about it now. Will rates rise further? I suspect that any good economic news will cause them to increase, though much more slowly, as markets may start pricing in an early end to quantitative easing. Initially, the equity markets are likely to be boosted by solid economic data but we will have to have strong numbers if investors are to look past rising rates. I am not sure that is in the cards, at least for a while. The Fed has triggered a recovery in interest rates and now we will see if that move was timed correctly. The die has been cast so there is no going back now.