Strong July Jobs Data Strengthens Case for Fed Rate Hike

U.S. employment rise and wage hike in July 2016 point to faster economic growth

After a slow start to the year, the U.S. economy now appears to be picking up pace that is expected to set the tone for the rest of the year. The U.S. Department of Labor released the July 2016 jobs data on Friday, August 5th, 2016, which shows a robust rise in employment for the second consecutive month. Another bright spot was a strong uptick in July 2016 wages, pointing to faster economic growth and raising expectations of a Federal Reserve interest rate increase later in 2016, as reported by Reuters on August 6th, 2016.

Nonfarm payrolls; Source: US Bureau of Labor Statistics
Nonfarm payrolls; Source: US Bureau of Labor Statistics

Nonfarm payrolls rose by 255,000 jobs after an upwardly revised 292,000 surge in June 2016, with hiring broadly based across all sectors. The U.S. Department of Labor revised upwards the change in total nonfarm payroll employment for May 2016 from 11,000 to 24,000, and that for June from 287,000 to 292,000. When combined, employment gains in May and June 2016 were 18,000 more than previously reported. Over the past three months, U.S. job gains have averaged at 190,000 per month. Workers put in more hours, increasing the average hourly earnings by $0.08, an increase of 2.6% Y-o-Y.

Unemployment rates; Source: US Bureau of Labor Statistics
Unemployment rates; Source: US Bureau of Labor Statistics

In July 2016, the unemployment rate remained the same at 4.9% with more people entering the job market. The signs of labor market strength, particularly the pickup in wage growth, could become an important aspect in the agenda of presidential candidates for the U.S. presidential election slated for November 2016. In a run-up to the election, Democratic candidate Hillary Clinton has said that she would focus on advocating higher spending for infrastructure programs.

Rising wages

In July 2016, apart from the average hourly earnings gain of 2.6%, the average workweek increased by 0.1 hour to 34.5 hours, the most since January 2016. With both hours and hourly earnings rising, workers’ take-home pay shot up 0.6%. Economists believe that the combination of strong employment data and robust wage growth would bolster income and consumer spending over the next few months.

Source: US Bureau of Labor Statistics
Source: US Bureau of Labor Statistics

The payrolls data, combined with strong July 2016 automotive sales, highlights sound U.S. economic fundamentals and the resilience of the economy to emerge stronger after months of sluggish growth. The Atlanta Fed is currently forecasting GDP to expand at a 3.8% annualized rate in Q3 FY16, after averaging at 1.0% in the last three quarters. While a maturing labor market would result in lower job creation over the next year, steady labor market growth is expected to make way for higher wages, which in turn could propel consumer spending in a big way in the coming months.

Sector-wise breakup of employment data

Source: US Bureau of Labor Statistics
Source: US Bureau of Labor Statistics

Manufacturing sector employment increased by 9,000 jobs in July 2016, while Construction payrolls rose 14,000 following three consecutive months of declines. Mining sector jobs fell a further 7,000 in July 2016. Professional and business services, added a healthy 70,000 jobs in July 2016, the most since October 2015. Retail sector employment increased by 14,700 jobs and jobs in the leisure and hospitality sector rose by 45,000. Temporary-help jobs, an indication of future hiring, increased 17,000. Healthcare and social assistance payrolls rose by 48,800 jobs, while Government employment increased by 38,000 jobs as state governments and local authorities hired more number of teachers.

Among other details, the participation rate, or the share of working-age Americans who are employed or at least looking for a job, rose to 62.8%. The employment-to-population ratio increased to 59.7% from 59.6% in June 2016.

A cause for concern is that a broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment rose to 9.7% in July 2016.

Strong job data strengthens case for Fed interest rate hike

July’s strong jobs growth, retail sales, and factory output has raised expectations that the Federal Reserve will raise interest rates this year. Fed Chairperson Janet Yellen had earlier stated that the economy needs to create just under 100,000 jobs a month to keep up with population growth. After the Fed raised interest rates for the first time in nearly a decade in December 2015, it has held interest rates steady because of concerns over low U.S. inflation and a global economic slowdown. However, Fed board member, Jerome Powell, has warned that any moves to raise interest rates may be gradual, as reported by the Financial Times.

After the release of July’s employment data, Fed futures contracts predicted a 46% chance of a rate hike by the end of 2016, up from about 34%. Of 21 primary U.S. Treasury dealers who do business with the Fed, 13 said the U.S. central bank would raise its target interest rate by a quarter percentage point by the end of the year, compared with 8 of 15 primary dealers in a July 8th, 2016, poll. Three of the banks polled said the Fed would raise rates at its September 20-21st, 2016, meeting. It remains to be seen whether the U.S. labor market will be able to sustain this pace of job growth over the next few months.

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