After years in disrepair, the American jobs machine is now humming along nicely.
A net 288,000 jobs were added in June, handily beating the consensus forecast of 215,000. It's the first five-month streak of job growth above 200,000 since the economic golden era of the late 1990s. Over the past year monthly job gains have also averaged around 200,000, which represents a decent pace of employment gains given American demographics and a stop-start global economy.
The unemployment rate in June fell to 6.1%, the lowest since September 2008, from 6.3%.
Thursday’s employment numbers, released early due to the July 4th holiday, confirm the general hope and expectation among economists that the jarring 2.9% decline in first-quarter GDP was a weather-distorted fluke, and that the economy rebounded through the spring and continues to improve at a measured pace.
At the same time, one month’s data cannot change the big picture of a U.S. economy and labor market operating below full strength.
The percentage of people either working or looking for work – known as the labor force participation rate – remains near a 30-year low at 62.8%. An aging population seems to have something to do with this shift, but certainly it also reflects a significant pool of discouraged and unwillingly idled workers following the trauma of the Great Recession.
Yes, job growth continues to be concentrated in lower-paying service jobs at restaurants, retail stores and temp agencies. Many skeptics contend this indicates the economy and job growth is still wobbly. But these are the positions through which the unemployed typically re-enter the active workforce.
A big question for the economic and investment outlook is when and whether wage growth will accelerate as slack is reduced in the job market. Wage growth has barely stayed ahead of inflation over the past couple of years, as companies have been able and willing to maximize profit margins amid weak revenue growth through high productivity. In June, average hourly earnings increased 0.2% from May, matching forecasts, bringing year-over-year wage growth to 2%.
As for the financial markets and the Fed, the June jobs numbers pretty much ratify the standard view that the economy is improving steadily, but not yet so quickly that the Fed will feel compelled to change its plan to keep short-term rates near zero into 2015 at least, after it ends its bond-buying program in the coming months.
This combination – an economy that is healing noticeably while still receiving the help of easy money – has been a soothing warm bath for financial markets. Credit markets are throwing cheap money at corporate borrowers and car buyers, while stocks have been lifted to new all-time highs.
It must be said that the market at these levels has essentially priced in this low growth/high liquidity situation, so the debate will now center over what could disturb it.
A few more months of solid job gains will embolden the hawks who want extreme low interest rates lifted to forestall future inflation pressures. The bond market, which has rallied unexpectedly this year, could get twitchy if wage inflation appears to be gaining momentum.
Still, the negative GDP number and Fed Chair Janet Yellen’s continued emphasis on weak wage growth and under-employment implies she prefers to err on the side of waiting longer to change policy.
If there’s a bright side to this debate, it’s that one so-called threat to the comfortable status quo in financial markets is that a very good thing – bigger paychecks for Americans – might just happen.
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