Will hot June jobs report chill Fed?
The labor market enjoyed a powerful rebound in June, posting a much-stronger-than-expected gain of 224,000 nonfarm payroll jobs. This effectively reversed the aberrantly soft May report, whose disappointing increase in jobs was revised further down to 72,000, and sparked a market sell-off on fears that a Federal Reserve rate cut priced in for late this month may be in jeopardy.
The critical read is how Fed policymakers interpret today’s labor-market bounce. In conjunction with last week’s higher-than-expected core PCE inflation reading of 1.6% year-over-year (y/y) for May and last weekend’s constructive meeting between Presidents Trump and Xi at the G-20 meeting in Osaka, Japan, this solid employment report almost certainly reduces the odds of a Fed rate cut at its July 30-31 policy-setting meeting. Investors had been discounting with 100% certainty a reduction of at least 25 basis points (and perhaps 50). A possible robust jobs showing in June and the potential of such to impact the Fed is exactly what we at Federated had feared last week, prompting us to lock in some profits at record highs and reduce our equity overweight in our PRISM® stock-bond model as we await more clarity on the data and the Fed’s intentions.
To be sure, this week’s June ISM manufacturing reading hit a new 3-year low at 51.7, while the ISM non-manufacturing index tied a 2-year low at 55.1, so this book hasn’t been fully written. We’re anxiously awaiting next week’s June update on core CPI and PPI inflation, the start of corporate earnings season on July 16 and the second-quarter’s flash GDP report on July 26. We believe that all of these metrics will help to inform the Fed as it constructs its data-dependent decision mosaic. Moreover, Fed Chair Jerome Powell will deliver his semi-annual Humphrey-Hawkins testimony before Congress on July 10-11, which may offer more clues on the Fed’s thinking.
Strong jobs rebound This morning’s June jobs report was a post-Independence Day fireworks display, with a stronger-than-expected gain of 224,000 jobs, compared with a consensus estimate of 160,000 and Federated’s even more conservative estimate of only 143,000. May, which was impaired by trade and global economic growth concerns, was revised down by 3,000 jobs to 72,000. April was revised down by 8,000 jobs to a final reading of 216,000. Monthly payrolls have averaged a gain of 172,000 thus far in 2019, so June ran well above trend. Government hiring in June rose by 33,000 jobs (its highest level of the year), led by a strong gain of 29,000 local hires. As a result, private payrolls rose by 191,000 in June, well above consensus estimates of 150,000 and more than double May’s downwardly revised increase of 83,000 jobs.
Weak ADP offset by solid weekly claims and Challenger job cuts ADP’s private-sector hiring survey disappointed for the second-consecutive month, posting a gain of only 102,000 jobs in June, compared with consensus expectations of 140,000 and an upwardly revised but nonetheless weak May gain of only 41,000. ADP said small businesses actually cut 23,000 jobs in June, after losing 38,000 in May. Also, the Challenger, Gray & Christmas survey reported nearly 42,000 job cuts in June, a 28% month-over-month (m/m) decline and a modest 13% y/y increase. Finally, the survey week for initial weekly unemployment claims, a critically important leading employment indicator, rose to 217,000 for the week ended June 15, 12% higher than the 49-year cycle low (matching September 1969) of 193,000 for the April survey week that ended April 13.
Household survey strengthens Among the many positives in this month’s report, the admittedly volatile household survey (a leading employment indicator) stood out, adding 247,000 jobs last month, compared with a gain of 113,000 jobs in May and losses of 103,000 jobs in April and 201,000 jobs in March. This bodes well for July.
Construction and manufacturing soar The construction industry added 21,000 jobs in June, compared with only 5,000 in May, 34,000 in April and 15,000 in March. The manufacturing sector surprisingly rebounded in June, adding 17,000 jobs (versus consensus estimates for a modest gain of only 3,000), compared with gains of 3,000 in each of May and April and a loss of 3,000 jobs in March.
Participation, labor impairment & unemployment rates all rise The labor force participation rate ticked up to 62.9% in June, but that’s still down from a 5-year high of 63.2% in February. The m/m increase in the civilian labor force nearly doubled in June to 335,000 from 176,000 in May, due to increased confidence of finding a good job. As a result, the official unemployment rate (U-3) ticked up to 3.7% in June from May’s 49-year low of 3.6%, and the labor impairment rate (U-6) ticked up to 7.2% in June from May’s 18-year low. There’s still slack in the labor market, and we expect U-3 and U-6 to resume their downward trend in coming months.
Wage growth & hours worked flat Average hourly earnings rose by a modest 0.2% m/m in June, versus an upwardly revised 0.3% gain in May and a robust 0.4% gain in February. The y/y gain was unchanged at 3.1%, down from February’s 3.4% increase, which was a 10-year high. The average private workweek for all employees was unchanged at 34.4 hours worked for the third consecutive month and for the fourth time in the past five months. A change of 0.1 hour worked theoretically adds or subtracts 350,000 jobs from the economy.
Retail hiring remains weak Despite retail sales strength over the past three months through May, the sector cut jobs for the fifth consecutive month, losing 6,000 in June, 7,000 in May, 15,000 in each of April and March, and 14,000 in February.
Temps modestly higher Temporary help (another leading economic indicator) added 4,000 jobs in June, versus a downwardly revised no change in May (originally reported as a gain of 5,000) and only 4,000 in April (originally estimated as a gain of 10,000), a loss of 11,000 in March, a gain of 7,000 in February and a loss of 26,000 in January.