A look back at the July 1 week has the actuality that everything before the release of the Employment Situation for June on Friday is less interesting. Given that the data on payrolls and earnings, and the unemployment rates – U3 and U6 – are vital to the upcoming FOMC decision at the meeting of July 30-31, all other reports in the week were a lead in-to the big act.
And a big act it was. Payrolls rose 224,000 in June (private up 191,000, government up 33,000), outdoing even the highest market surveys of forecasts. Of course, the relatively soft numbers for private payrolls in the ADP (up 102,000) caused many forecasters to pare down their estimates. In any case, the difference seems to have mainly been in contrary reads of goods-producing jobs. The BLS data reported 154,000 new jobs at service-providers and 37,000 among goods-producers. The ADP data was a more modest gain of 117,000 for service-providers and a decline of 15,000 for goods-producers.
The 0.2% month-over-month increase in June in average hourly earnings may have been mild, but the up 3.1% year-over-year suggests that even with somewhat less certain conditions for the economy, not only are businesses continuing to hire, upward pressure on wages has only abated slightly.
The one-tenth increase in the unemployment rate to 3.7% does not change that there is very little slack in the labor market with new entrants being absorbed quickly. The broader U6 rate of unemployment also was up a tenth to 7.2%, consistent with readings not seen since 2000. Workers on the margins are seeing conditions not present in nearly 20 years.
Initial jobless claims for the week ended June 29 retreated 8,000 to 221,000. This level tracks with the underlying trend in the four-week moving average of 222,250. The insured rate of unemployment remained at 1.2% where it has been since early May 2018. There are no indications of deterioration in the labor market here. The Challenger report on layoff intentions showed that announced job cuts are fading from earlier this year and were down 28.3% in June to 41,977. While levels were 12.8% above last year’s 37,202, some of this is the continued contraction in the retail sector that has yet to run its course.
The upshot is that the labor market is tight and vibrant with exceptional numbers of workers seeking new opportunities and higher pay. Those who argue the necessity of a rate cut to ensure that the economy does not slip into recession will not find much to bolster their viewpoint here. The employment side of the dual mandate is faring well and needs little attention on the part of the Fed, expect perhaps in concerns about a prolonged undershoot. However, that can be taken against inflation data that suggests that wage and benefits costs are not making their way into upward price pressures, and that commodities prices are keeping overall inflation down compared to moderate increases for services.
A balanced approach to monetary policy – which policymakers advocate – suggests that no action is presently needed. However, the present argument is that an “insurance” cut is required to keep a possible downturn at bay. It so, it will rest on how risks are assessed at the next FOMC meeting.
The ISM Manufacturing Index turned lower to 51.7 in June after 52.1 in May and the Non-Manufacturing Index for June slipped to 55.1 from 56.9. Both sectors are more-or-less on trend with factory activity modest at best, while services are managing to hold on to middle expansion. In both cases, survey respondents were keenly aware of the present and potential impacts of trade and tariff policy, and facing higher costs and supply chain disruptions as a result. Readings for activity/production and orders are uneven, but employment is fairly steady at solid levels.
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