Strong Job Creation, but Disappointing Earnings Growth

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The optics of the US jobs data were mixed.  Jobs growth was better than expected, but earnings growth disappointed.  The rise in the unemployment rate, the first in many months, is a reflection of the increase in the participation rate.  Canada’s jobs and trade data disappointed, but not sufficiently so to alter expectations for a hike next week.  

The US continues to create plenty of net new jobs, but earnings growth softened.  The jump in the participation rate from 62.7% to 62.9% looks responsible for the rise in the unemployment rate to 4.0% from 3.8%.  Underemployment also rose (7.8% from 7.6%).

Non-farm payrolls rose 213k, about 20% more than expected and the previous two months were revised higher by 37k (11k in May and 26k in April).  Job growth averaged  205k a month in Q2 after 218k average in Q1 and 221k average in Q4 17.  Keep in mind that non-farm payrolls by itself are a poor predictor of GDP growth.  Although non-farm payrolls growth was slower than the previous two quarters, GDP in Q2 appears to have accelerated.

Average hourly earnings rose 0.2%, which while less than the expected 0.3%, is in line with the longer-term averages.  The year-over-year pace of 2.7% is unchanged but at the upper end of where it has been in recent years.   Moreover, hourly earnings growth exceeds CPI and productivity.

US manufacturing added 36k jobs, the most this year.  The auto sector accounted for a third of these jobs, the most in nearly a year.   Recall that June auto sales were the best in the Q2 and the second best of the year.  Government payrolls increased by 11k, the most in a year.   Despite the slightly disappointing earnings growth, the data does not pose any challenge to the current trajectory of the Federal Reserve’s monetary policy and a rate hike in September, despite trade concerns.

Separately the US reported the May trade deficit that was in line with forecasts.  At $43.1 bln, it was the smallest since October 2016. The US exported twice the dollar value of soybeans ($4.1 bln) than civilian aircraft ($1.9 bln).  The soy exports doubled in May over April, perhaps as there was a rush to be the imposition of tariffs.   Overall, though the US trade deficit with China widened to $32 bln from $30.8 bln.  In real terms, that is adjusted for prices, the US trade deficit fell by almost $2 bln to its smallest level since March 2017.  Trade could make a small positive contribution to Q2 GDP.

Canada, on the other hand, reported disappointing trade and jobs data, but not sufficiently so to change the outlook for a Bank of Canada rate hike next week.  The trade deficit was slightly wider than expected (C$2.8 bln vs. median forecast for C$2.2 bln and C$1.9 bln in April).  Overall job growth of 31k would appear to be constructive, but the composition favored part-time positions.  Full-time jobs rose a little more than 9k while economists were expecting closer to 30k. Average earnings of permanent employees slowed more than expected (3.5% from 3.9%).  The participation rate increased to 65.5% from 65.3%, which, as in the US, accounted for the rise in the unemployment rate (6.0% from 5.8%).

The US dollar and interest rates eased after the data.  The Canadian dollar lagged.  Of note, the euro is trading at new three-week highs, reaching almost $1.1765. The dollar initially eased to JPY110.45.  The week’s low is just below JPY110.30.  Sterling approached yesterday’s high before stalling.  It remains vulnerable to Brexit headlines today.