US Watch – Job vs. wages

by: Maritza Cabezas

150702-US-Employment.pdf (55 KB)
  • The labour market cools down a bit in June, but job gains of 223K suggests that the labour market remains solid. The unemployment rate edged down to 5.3% from 5.5% the previous month, as fewer people were looking for a job. Meanwhile, wage growth was subdued.
  • Although this report was not as strong as we expected, the job market remains firm and should keep the Fed on track for a rate hike in September 2015.



Job growth cools a bit, but remains strong

US job growth cooled a bit in June after reaching a five month high in May. Nonfarm employment increased 223K in June, down from a revised 250K the previous month. Even with this slowdown, June’s increase is still above the average of the first five months of the year. The unemployment rate edged down to 5.3% from 5.5% the previous month, partly as a result of 432K people dropping out of the labour force. Meanwhile, measures of underutilisation of labour were mixed. Persons employed part-time for economic reasons fell to 10.5% from 10.8% the previous month, while the participation rate fell to 62.6% from 62.9%.

Job growth mainly boosted by services

Turning to the establishment survey, the gains in employment continue to be broad-based in the service sector. Professional business services added 64K and education and health 50K. The goods producing sector was weaker. Construction saw no hiring. Manufacturing (including oil and gas) continue to show modest job gains, likely as a result of the impact of the strong dollar, which affects the export manufacturing industry and the lower oil prices, which are taking their toll on the energy-related industries.

Wage growth subdued

Wage growth was unchanged in June down from 0.2% the previous month. On a year-on-year basis, wage growth was 2.0%, edging down from 2.3% the previous month. Although wage growth is the weaker part of this report, we expect wages to catch up as the economy strengthens. Stronger wage growth would complete the picture of a healthy job market.

Strength of US economy calls for rate hike

Job gains above 200K is a sign of a strong labour market, while in the long run a falling unemployment rate is a prime rationale for normalizing interest rates. We think this report should keep the Fed on track for a September liftoff. In its June meeting, the Fed turned more cautious on the pace of interest rate hikes after the slowdown in growth in the first quarter. On that front, the May and June job reports should give the Committee more confidence. On top of this, we are seeing an improvement of the economic data going into the second quarter. Indeed, consumers are making a strong comeback. Real consumer spending is now tracking a solid 2.9% annual growth rate in the second quarter, after a disappointing first quarter. Meanwhile, the housing market, and non residential investment growth are looking more solid. Business investment is also gaining some momentum. This all shows that growth is becoming more broad-based.