The June Employment Report

Nonfarm payrolls rose more than expected in the initial estimate for June. The news sent equity futures lower, bond yields higher, and reduced the odds of more aggressive Fed policy action later this month. However, the payroll data are noisy. The underlying trend is private-sector job growth is slower this year, but it’s still relatively strong. The job market is tightening further. Wage growth has remained moderate, but there is scope for improvement for those who had missed out on much of the economic recovery.

Nonfarm payrolls rose by 224,000 in the initial estimate for June, while the two previous months were revised a net 11,000 lower. The financial press and market participants react to the headline number, but these figures are choppy. There is statistical noise and seasonal adjustment is difficult. However, the noise will cancel itself out over time. That’s why one should never focus too much on any particular month and look at the underlying trend. That underlying trend has slowed this year. Private-sector payrolls averaged a 156,000 monthly gain in 2Q19 (vs. +165,000 in 1Q19 and +215,000 in 2018). We need less than 100,000 net new jobs per month to absorb new entrants into the labor force, so we’re still well beyond a long-term sustainable pace. Some of the slowing could reflect the tightness in job market conditions. Firms continue to report difficulties in finding qualified workers. However, slower job growth also reflects slower economic growth – and in turn, slower job growth would imply slower growth in consumer spending and in the overall economy.

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Prior to seasonal adjustment, job gains are strongest through the spring. The U.S. economy added 3.9 million jobs between January and June this year, down from 4.5 million over the same period last year and 4.1 million in 2017. Growth in manufacturing jobs has slowed this year, reflecting weakness in the factory sector. Bricks-and-mortar retail continued to lose jobs (department store jobs down 3.1% y/y), partly offset by job gains in couriers (+5.4%) and warehousing (+4.7%). Demographic changes (an aging population) continued to drive growth in healthcare jobs (+2.5% y/y).

Average hourly earnings rose 0.2% in June, up 3.1% y/y (the 2Q19 average was up 3.2% y/y, with production workers up 3.4%). Wage increases are not distributed evenly. Some workers are not keeping pace with inflation (cough, cough), while others are seeing stronger gains. Those at the low end of the income scale have seen the strongest gains more recently, but that comes from a very low level (entry-level wages were held down during the recession and gradual recovery).

In the Chicago Fed conference on monetary policy in early June, Fed officials heard from academics, but also from community leaders. In his June 19 press conference, Fed Chair Powell noted that there are “communities that are being brought into the benefits of this expansion that hadn’t been earlier.” He added, “we’re 10 years deep into this, and that’s something we heard quite a lot at the conference.” This, in turn, contributed to the FOMC’s focus on “sustaining the expansion,” according to Powell. Wage gains have been moderate overall, but a number of Fed officials would like to see further improvement at the lower end of the range.