More of the Same

The U.S. economic data reports have remained mixed, consistent with a moderately strong pace of growth in the near term. The June jobs data suggest that a September Fed rate hike may be a closer call than thought earlier. Meanwhile, Greece’s economy is in tatters. The country has to face the burden of further austerity or the chaos of a euro exit.

Payrolls rose by 223,000 in June, not far from the median forecast (+230,000), but figures for April and May were revised a net 60,000 lower. At 221,000, the average monthly gain in 2Q15 was still strong, by historical standards.

The unemployment rate dipped to 5.3% in June, the lowest since April 2008. However, the decline was due to a further drop in labor force participation, the lowest since 1977. That’s likely just noise (statistic uncertainty and seasonal adjustment issues), but the employment/population ratio suggests that a considerable amount of slack remains in the labor market. Slack is being taken up, but (despite strong job growth over the last year) we are still a long way from a full recovery in employment.

The job market outlook will be a key factor in the Fed’s decision to begin raising short-term interest rates. Policymakers have also signaled that they need to be “reasonably confident” that inflation will move toward the 2% goal (core inflation, as measured by the PCE Price Index, rose 1.2% for the 12 months ending in May). Wage growth is the key issue in both of these policy triggers. Reduced labor market slack should eventually lead to wage pressures and, barring a rise in productivity growth, higher labor costs are likely to be eventually passed along to consumers. Last month, average hourly earnings were reported to have risen by 0.3% in May, generating some fear the rising wage pressures would force the Fed to begin tightening sooner rather than later. In contrast, the June jobs report showed earnings unchanged in June, while the May increase was revised down to +0.2%. That left nominal earnings up 2.0% for a year ago, the same lackluster pace of the last few years.

The Fed need not wait for “the white of inflation’s eyes” before raising rates. Monetary policy is based on where officials expect the economy to be in a year. Chair Yellen has noted that policy will still be “very accommodative” even after the first couple of hikes. On the other hand, the risks aren’t symmetric. Tightening too soon would be more costly than moving too late. However, the more important question is the pace of tightening beyond the initial hike. That pace is expected to be gradual, but it could be made even more measured if the economy were to stumble or grow more slowly than anticipated.

Greece votes on July 5 whether to accept further austerity conditions, but it’s unclear what will happen regardless of the outcome. “Yes” would mean a new government, new negotiations, and further uncertainty. “No” would likely lead to an exit from the monetary union, but that’s not entirely clear. Greece’s economy is going to suffer either way and global financial markets are likely to remain stressed in the near term.

© Raymond James

© Raymond James

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