June Jobs Report
….US adds 222,000 jobs in June. Unemployment rate rose to 4.3%. Wages up 0.2%. U6 at 8.6%. Reasons for flat wage growth. Fed will stay the course.
Financial Review by Sinclair Noe for 07-07-2017
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The US added 222,000 new jobs in June. The unemployment rate rose from 4.3% to 4.4%. After 3 months of disappointing jobs reports, the June number easily topped expectations of around 175,000. The unemployment rate rose as more people entered the labor market. The labor-force participation rate inched up to 62.8 percent, from 62.7 percent.
Hiring was also stronger in May and April than previously reported. April was revised up from 174,000 to 207,000, and the change for May was revised up from 138,000 to 152,000. Revisions added 47,000 more jobs to April and May than previously reported. Over the past three months, job gains have averaged 194,000 a month. Over the past 12 months, the economy added 2.24 million jobs.
Hourly pay rose a 0.2% to $26.25 an hour in June. Wages have advanced a modest 2.5% in the past 12 months, up slightly from the prior month but still well below the usual gains at this late stage of an expansion, and below expectation. Companies continue to find ways to restrain labor costs. Average hourly earnings are a key measure of potential inflation pressures.
The U6 unemployment rate rose two-tenths of a percentage point to 8.6 percent last month. U6 is a broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment. This alternative measure of unemployment hit a 9-1/2-year low in May. It has declined eight-tenths of a percentage point this year. The measure known as people working part-time for economic reasons rose by 107,000 to 5.33 million.
Employment gains were broad in June, with manufacturing payrolls rising 1,000 after factories lost 2,000 jobs in May.
But the automobile sector lost a further 1,300 jobs as slowing sales and bloated inventories forced manufacturers to cut production. The auto sector has lost jobs for three straight months. Ford Motor has announced plans to cut 1,400 salaried jobs in North America and Asia through voluntary early retirement and other financial incentives. General Motors will extend summer assembly plant shutdowns, which will leave workers temporarily unemployed.
Construction added another 16,000 jobs last month. Healthcare employment surged by 59,100, while the professional and business services sector created 35,000 jobs. Temporary-help jobs, a harbinger of future hiring, increased by 13,400. Restaurants and bars hired 29,300 workers. Mining and logging gained 8,000 jobs – mining includes oil drilling and oilfield services. There has been a tick-up in jobs in coal mining — one of the industries that Trump has targeted for regulatory relief — yet the gain has been minuscule, just over 2,000 since a low point in August of last year.
Retailers hired 8,100 workers, a respite for a sector which had shed jobs for four straight months. Department store operators like JC Penney, Macy’s and Abercrombie & Fitch are struggling with stiff competition from online retailers led by Amazon. Wholesale trade added 10,000 jobs.
Government employment rebounded by 35,000 jobs last month, with gains at federal and local governments. That means private sector employment grew at a more modest 187,000 for June. During the first five months of Trump’s term, the economy has added 821,000 private sector jobs, and 42,000 public sector jobs; this represents a turnaround from the prior 8 years, when the economy lost 268,000 public sector jobs.
June has been the strongest month for job growth over the three previous years, followed by July and November. This is the 4th consecutive solid job gain in June: 304,000 in June 2014, 206,000 in June 2015, 297,000 in June 2016, and now 222,000 in June 2017. It makes sense. In June and July, we see new graduates moving into the labor market. Also, weather conditions are favorable for construction and mining and other industries. Also, a strong seasonal tendency for leisure and hospitality. These factors might explain the small bump to 62.8% in the labor force participation rate, the percentage of the working age population in the labor market. However, it doesn’t look like we are really pulling people off the sidelines. There is still a strong demographic consideration as baby boomers retire; the labor market may be solid but the availability of jobs and weakness in wages is not enough to pull boomers out of retirement. And most boomers who retire are leaving reasonably good paying jobs, to be replaced by younger, less experienced workers who will pull down smaller paychecks. Meanwhile, employers continue to complain about the lack of skilled workers, or for low-skill, low wage jobs, the complaint is a lack of willing workers. Supply and demand would indicate higher wages.
By most measures the economy is strong and the labor market seems healthy. Jobs are popping up all over the country. Last month, the unemployment rate hit the lowest level in 16 years. Yet wage growth has been anemic. The pay that workers take home has risen a little since the depths of the recession, but not much. Once you factor in inflation, wages growth is so low that workers are hardly better off than they were a year ago. Given strong job growth and low unemployment, and the strength and duration of the economic recover – wages should be rising faster by now. As the economy continues to heat up and companies create more job opportunities, employers should eventually have a harder time finding the caliber of workers that they want. To attract good workers, companies in theory have to start offering pay increases. As we move into the 9th year of the economic recovery, wage growth stands at 2.5%, exactly the same as in 2009, when the unemployment rate was 10% – more than double the current rate.
One explanation for weak wage growth is that productivity has been sluggish. But blaming productivity for slow wages is not a full explanation. Workers are not lazier than before. Some point a finger at policies that have failed to encourage investments in machinery and technology to explain low productivity. Also, a dramatic decline in unionization in recent decades has left workers less able to bargain with company owners for pay increases. At the same time, globalization has allowed companies to be more mobile than ever before. If labor gets too expensive in one location, companies can just move.
Sluggish wage growth tells us that there’s still a fair amount of slack left in the labor market. So, if we filter out retiring workers, and younger people staying in school, we see the 25 to 54 participation rate was unchanged in June at 81.7%, and the 25 to 54 employment population ratio increase to 78.5%, still significantly below where it was in 2007 and for most of 2008. So where are all those working age people? What are they doing? Just sitting around? Nope. They are probably working, just not regular jobs, or at least not regular jobs in the regular sense.
As companies cut jobs and benefits, many workers found their own work and set their own hours. Not just Uber drivers, but also as independent contractors, sometimes working with previous employers. Sometimes entrepreneurs starting up their own business. One of the biggest changes was in healthcare. Employers didn’t want to pay for it. Workers could now get insurance through the ACA exchanges, and they no longer had to stay in otherwise unfulfilling careers because their full-time jobs gave them access to health insurance benefits. Recent statistics from Treasury Department show that one in five people who accessed health insurance from the exchanges created by the ACA were business owners or self-employed. The 2016 presidential campaign included lots of discussion about the jobs in factories and mines – jobs that have be vanishing for decades – while almost entirely overlooking the explosion of freelance work that will account for 40 percent of the U.S. workforce by 2020, according to some estimates. That’s 60 million Americans. Even if the number is less, it is probably much more difficult to measure than traditional jobs, and likely under-represented in the government stats.
The lack of wage growth is not just important for workers, it also matters for policy makers because it has the potential of feeding into inflation – which has eluded the Fed’s 2% target – and progress on that front would play a role in determining the pace of interest-rate hikes by the central bank. The Fed has noted that they have essentially achieved full employment and are forecasting a pickup in inflation, so maybe the Fed is looking at the gig and freelance economy in their calculations. While wages were a weak spot in the June report, it still marked a relatively strong finish for the labor market in the second quarter. That should support continued gains in consumer spending in the coming months and probably keep the Fed on track with plans to start reducing their balance sheet and increase borrowing costs once more this year. Right now, the consensus is that the Fed will start trimming their balance sheet in the next couple of months, that would coincide with the FOMC meeting in September. They will start gradually and increase the sales incrementally. That would leave December for the Fed to hike interest rates for the third and final time this year.
The Fed wants to get back to more normalized settings, and the June jobs report was solid enough for the Fed to continue tightening, but it also points to slack with weakness in wages. And the mere fact that the economy added 222,000 jobs, this late in the recovery suggests slack. You can’t add workers to your payrolls if there are no workers to take those jobs. It would be a mistake to make too much of one month’s numbers, but for now the numbers support optimism that the labor market has room to get better and with higher wages for more workers.