Nonfarm employment increased 287K in June, but that followed just 11K in May; the unemployment rate edged up to 4.9%, as a result of an increasing labour force. Wage growth edged down to 0.1% after increasing 0.2% in May; we don’t see much room for a rebound in wage growth given weak business activity. This jobs report will not likely change the thinking of Fed policymakers as the underlying job growth is still cooling. Fed officials will want to see how global developments, including Brexit play out. Our base case is for no rate hike this year160708-US-Employment-June-Report-2.pdf (225 KB)
US nonfarm payrolls added 287K in June…
Nonfarm employment increased 287K in June, but that followed a downwardly revised 11K in May. This rebound includes some 35K jobs that were shaved off in May during the Verizon Communications strike. Moreover, the underlying trend in hiring is cooling. The three-month average gains in nonfarm payrolls has been declining even before the Verizon strike. Meanwhile, the details of the establishment survey suggest that goods-producing sector showed only minor increase in hiring (9K). The manufacturing sector hired 9K after cutting 41K the previous month, while construction was weak with no hiring. In contrast, service-producing activities, outside Verizon, showed a considerable improvement. Notably education and health (+ 59K) and leisure and hospitality (+59K) made the strongest contributions.
…while unemployment edges up to 4.9% as a result of increase in labour force
Meanwhile, the message from the household survey was slightly positive. The participation rate edged up to 62.7% in June from 62.6% the previous month. This is a positive reversal since the rate declined by 0.4 ppts over the past two months, offsetting gains of in the first quarter. As for the unemployment rate, it increased by 0.2 ppts to 4.9%. This rise is explained by the increase in the civilian labour force (414K). It means that more workers outside the labour force are being drawn off the sidelines. If this trend continues, this could delay labour market tightening. Indeed apart from the dip in May, the unemployment rate has been 4.9%-5% for 9 months.
Wage growth slows modestly
Average hourly earnings edged down to 0.1% after increasing 0.2% in May. The annual increase of average hourly earnings was 2.6%, up from 2.5% the previous month. This is still below the 3-3.5% trend wage growth that the Fed would like to see. Wage growth remains a concern for Fed officials. We don’t think that there is much room for strong wage growth in the coming time, particularly if more workers are drawn back to the labour market. Moreover, business activity in the US continues to show signs of weakness, which suggests limits to higher wages.
Markets no longer pricing in a rate hike in the coming two years
Although the impact of Brexit for the US economy is expected to be manageable, after the Brexit referendum markets are no longer pricing in a rate hike in the coming two years. However, after this jobs report the federal funds futures, chance of a rate hike in 2016 pointed to a 22.4%, up from 11.8% the day before. We don’t think that this jobs report will change the thinking of the Fed too much. Recent interventions from Fed policymakers, including Vice Chairman Stanley Fischer and Fed Governor Jerome Powell, suggest that it is too soon to evaluate the impact of Brexit and that they will opt for a ‘wait and see approach’ before they consider further rate hikes. Global developments have resulted in somewhat tighter financial conditions in the US. We expect other major central banks to continue easing and this will likely tighten financial conditions in the US further, but it is likely to remain manageable.