June Employment Report Supports Further Fed Tightening

Mon, Jul 10, 2017 - 8:45am

A generally upbeat June 2017 employment report supports the Fed's case for additional monetary tightening, most likely in the form of balance sheet action in September followed up by a 25bp rate hike in December. Moreover, the solid pace of job growth will encourage the Fed to maintain 2018 policy projections as well. Although the unemployment rate ticked up, ongoing job growth at this pace will eventually push it back down. Weak wage growth continues to restrain the Fed from accelerating the pace of easing; the tepid pace of wage gains suggests the Fed's estimates of full employment remain too high.

Read Jobless Claims and Economic Turning Points

Nonfarm payrolls rose by 22sk in June, above expectations. Moreover, both April and May were revised higher. The three month and twelve-month paces are just below 200k. Job growth continues to slow, but the rate of decline is very shallow:

Looking into the future, temporary help payrolls continue to climb after the transitory slowdown in 2015:

This typically indicates sustained broad job growth in future months. Further evidence of a solid job market is visible in the accelerating of aggregate hours worked:

Payroll growth remains above the roughly 100k the Fed believes is necessary to hold the unemployment rate constant once demographic impacts outweigh cyclical impacts on labor force growth. For June, however, the unemployment rate ticked up on the back of higher labor force participation:

Still, the Fed won't take much relief in the gain. For all intents and purposes, labor force participation has been moving sideways since 2014:

The monthly variance so far has been just noise.

Despite low unemployment, wage growth remains anemic:

One would have expected a pickup in wage growth if the economy were indeed operating substantially beyond full employment. This gives the Fed something to think about in the latter half of this year - they don't want to choke out growth too quickly if the natural rate of unemployment is in fact much lower than current estimates. Still, there's a concern that wage growth will soon spike if their estimates are correct encourage most Fed policymakers to keep their foot gently on the brake.

Bottom Line: Even as weak wage growth couples with soft inflation to raise a bit of caution among central bankers, the overall tenor of the labor markets remains sufficient for the Fed to maintain its tightening bias. They really need softer job numbers to throw in the towel on their expected policy path for 2017 and 2018.

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Professor of Economics
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