Nonfarm payrolls rose more than expected in June, but the unemployment rate rose and average hourly earnings rose moderately. That’s a seemingly sweet combination for investors. The economy remains strong, but not so much that the Fed has to slam on the brakes. Still, the central bank is widely expected to raise short-term interest rates further and the broad range of labor market data paint a somewhat puzzling picture.

Recall that the employment report consists of two separate surveys. The establishment survey, which covers about 149,000 businesses and approximately 651,000 worksites, yields estimates of nonfarm payrolls, average weekly hours, and average hourly earnings. The household survey, which is based on a sample of 60,000 households, generates estimates of labor force participation and the unemployment rate. The size of the household survey is small, too small to give us accurate estimates of levels (such as the size of the labor force or total employment), but large enough to yield reasonably accurate measures of ratios (such as the unemployment rate and labor force participation). Still, statistical uncertainty and seasonal adjustment add noise to the job market figures. The monthly change in nonfarm payrolls is reported accurate to ±115,000 (that’s a 90% confidence interval for those of you who stayed awake in statistics class). The unemployment rate is reported accurate to ±0.2%.

The impact of noise in the establishment data can be reduced by taking the three-month average. Private-sector payrolls averaged a 205,000 monthly gain in 2Q18, a bit less than the first quarter’s 218,000 pace, but higher than the average of the last two years. That may not mean much. These figures will be subject to annual benchmark revisions (derived from actual payroll tax receipts) next February, but the results are consistent with other indicators of labor market strength. We need a little less than 100,000 jobs per months to absorb new entrants into the workforce – so the recent pace of job growth is unsustainable over the long run.

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