US Outlook Report: A Rock Solid Employment Report for June
A hot June employment report belies weak U.S. job growth in April and May and is an important support for the second-quarter recovery in consumer spending and GDP growth we are forecasting. While a rebound in U.S. employment growth in June was expected, the strength of the recovery was impressive and generally exceeded economists’ expectations. Given the on-going decline in U.S. jobless claims and the rebound in June payrolls, the dismal May jobs report appears to be a one month aberration, as we suspected, rather than the start of a pronounced economic downturn.
According to the Bureau of Labor Statistics, the U.S. economy added another +287K net new jobs in June – a huge step up from the revised paltry +11K jobs created in May. However, the market celebration will be more muted than normal as investors brace for the global economic impacts from abroad. Moreover, it will likely take more than one month of better job gains to convince the FOMC that another interest rate hike is warranted.
It is important to note that this employment report reflects U.S. economic reality before the U.K. vote and also incorporates a catching-up of sorts from the lack of job growth in May and a rebound of nearly 40K striking Verizon workers returning to their jobs in June. The U.S. monthly job growth trend going forward is likely to be quite a bit lower than the June +287K increase.
Still, Fed funds futures market and the U.S. Treasury bond market have probably over-done their downward adjustment in interest rate expectations, setting up the fixed income market for somewhat higher yields ahead. The Fed funds futures markets are now pricing in just a 22% probability of the next Fed rate hike happening in December 2016. While market expectations have moved up to a near-even chance of another Fed interest rate hike by December 2017. Just a day ago the market was placing only a 12% probability on a December 2016 rate hike from the Fed and 40.5% probability of a move by December 2017, so market interest rate hike expectations are already gradually moving higher.
My view is that December 2016 rate hike is still on the table and actually quite possible. This view has been bolstered by the resilience of the June payroll report and the U.S. labor market recovery in general.
Looking into the details of the June payroll report, there were broad-based job gains across sectors last month with no major sector losing jobs except mining, which shedding another 5K jobs due to low energy prices and decreases in domestic production. Education and health care and leisure and hospitality sectors lead the way with a net increase of +59K each. Information and business services came in with decent gains of +44K and +38K respectively. Retail trade even added another +30K jobs despite the cannibalization of retail sales through on-line companies such as Amazon. Even manufacturing managed to add +14K jobs, despite the headwind of lackluster global growth and staunch competition from abroad. Construction held steady with no net job creation last month.
The U.S. unemployment rate did tick-up to 4.9% in June from 4.7% in May, but that was due to a large influx of entrants into the labor force. The U.S. labor force increased by +414K people in June with the labor force participation rate increasing to 62.7% from 62.6% in May. This is a sign that a tightening labor market is encouraging more people to actively seeking work.
In short, just a few more employment reports like June’s and genuine optimism could breakout.
To find out more, check out this week’s US Outlook Report.
Tags: employment, US economy, US outlook