US Job Growth Meets Fed’s “Some” Improvement Threshold

The US employment data was largely in line with market expectations, which were for continued improvement in the labor market.  There still is one employment report before the FOMC meeting in September, but the risks of a lift-off then appears to have increased. 

The US employment data was largely in line with market expectations, which were for continued improvement in the labor market.  There still is one employment report before the FOMC meeting in September, but the risks of a lift-off then appears to have increased.

The 215k rise in nonfarm payrolls is in line with the six month average (213k).  The May series was revised up by 6k and the June report by 8k.  Manufacturing added 15k jobs, three times more than the consensus.  The unemployment rate was unchanged at 5.3%, just above the Fed’s estimated range for full employment.  Earnings growth was in line with expectations, rising 0.2%, but the year-over-year rate did not tick up as much as expected.  It stands at 2.1% up from 2.0% in June.

Two other details are notable.  First, the average weekly hours rose to 34.6 hours from 34.5.  It does not seem like much, but given the number of workers, an extra six minutes a week turns into a lot of full time equivalents.  This speaks to output more than employment.  Many economists see an increase in the work week as a necessary precondition to more aggressive hiring.  Of course, it needs to be sustained.  Second, the underemployment rate slipped to 10.4% from 10.5%.  This is a new cyclical low.

On balance, we suspect that the jobs data meets the Fed’s criteria of more improvement before raising rates.  Ideally, this will be confirmed in the Labor Market Conditions Index and the JOLTS report out next week.

The contrast between the US and Canadian economy is driven home today.  Canada created 6.6k jobs, a bit more than expected, but the mix was poor.  It lost 17.3k full time jobs after gaining 64.5k in June.  It gained 23.9k part-time jobs after losing 71.2k in June.  The seasonal adjustment seems to account for the higher volatility.  The US participation rate remained at 62.6%, matching the cyclical low.   Canada’s participation rate slipped to 65.7%, unwinding the modest improvement seen in Q1 and Q2.

The dollar traded higher in response to the employment data and US yields edged higher. However, short-term players looked to fade the initial move, expecting range trading to dominate.