This week we crossed the mid-year threshold and closed out a second quarter that was punctuated by continued strong growth and an unwelcome but unsurprising jump in inflation to the highest levels in a decade or more. We learned that manufacturing activity remains in expansion mode, that home prices around the country are soaring, and that consumer sentiment is buoyant with positive expectations about the future.
The big event for the week was the labor department’s employment report this morning which showed that US non-farm payrolls growth was a solid 850K in June, well above estimates and the biggest jump since last August. However, the labor force participation rate remained stubbornly stuck at 61.6%. The unemployment rate (calculated from a different survey) showed an uptick to 5.9% which was three ticks higher than the estimate. Underemployment, which includes marginally attached and part-time workers wanting full-time jobs, fell four tenths to 9.8%. Average hourly earnings came in as expected at 3.6% annualized, and average hours worked unexpectedly fell to 34.7 a week.
Labor market indicators remain well below pre-pandemic levels when the unemployment rate was 3.5% and the participation rate was over 63%. There are still nearly 7 million fewer employed persons in the US than at the beginning of 2020. Still, the June report shows clear and steady improvement. Sectors hit hard by the pandemic continued to show progress in returning to full employment. Jobs in leisure and hospitality increased by 343,000 as restrictions continued to ease. There remains a lot of noise in the numbers as staffing fluctuations in education due to the pandemic, in part reflecting the return to in-person learning and other school-related activities, have distorted the normal seasonal buildup and layoff patterns, likely contributing to the job gains in June. The number of persons not in the labor force who currently want a job was 6.4 million, little changed over the month but still up by 1.4 million since the beginning of last year.
Other data for the week included the US Merchandise Trade Balance for June which was slightly lower at $71.2b, factory orders which ticked up to 1.7%. Durable goods orders and capital expenditures showed modest but steady improvement.
Fed officials continue to reinforce the idea that the US economy is making good progress toward meeting their objectives, and that the inflation surge will fade in the second half of the year. Still, policymakers now expect to be shifting gears on policy and raising rates a bit sooner than previously thought. An actual policy pivot won’t take place until the economy achieves “substantial further progress,” the cryptic and undefined phrase that allows the Fed to waffle on precise timing. The first increase in the fed funds rate is now plotted for 2023, two years from now. Still, that is sooner than previously expected, and QE “tapering” will certainly begin before that. Dallas Fed President Kaplan, made clear this week that it will soon be time to slow the pace of asset purchases from the current $120 billion a month. “If we take our foot off the accelerator gently now, we’ll have more flexibility down the road to avoid more abrupt action.” Amen to that. Let’s steer clear of tantrums this time. Happy Independence Day!
US Labor Force Participation Rate: June 2015-Today
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