Of the various economic reports that come out, the monthly employment report tends to garner the greatest focus. In addition, when the report is released, it frequently has a significant impact on both the bond and stock market — if the data differs from expectations.
The report released last Friday came in above expectations with 255,000 jobs created for the month of July. The stock market reacted positively to the report, while the bond market sold off, as interest rates rose, though they still remain at very low levels.
Likewise, wage growth is showing some signs of improvement with the yearly change at 2.6%. In recent years wage increases were averaging closer to 2.0%.
While one month’s number oftentimes is not that significant, employment gains for the month of June were also strong. However, the employment report for the month of May was rather weak.
Looking at the various gyrations in the monthly data, most likely the underlying trend in job growth has not changed significantly. In recent years job growth has been averaging close to 200,000 per month, which has been enough to bring the unemployment rate down to just below 5% on a national basis.
Several months ago there had been some concern that monthly employment growth was starting to slow to a level of maybe 100,000 to 150,000 net new jobs per month. This most recent report tends to refute that slowdown, as it appears that job growth, when looking at a 3-month average, is still close to 200,000 per month.
To keep the unemployment rate relatively stable job growth needs to average close to an increase of 100,000 per month, well below recent figures. Given that the unemployment rate is relatively low, it would not be surprising to see job growth start to slow in the not to distant future.
There is one possibility where job growth can still remain relatively strong for an extended period of time, even without the unemployment rate dropping. That is if the labor force participation rate increases. In recent years a number of people have dropped out of the labor force, so the current labor force participation rate is quite low.
While the employment picture has been improving, other areas of the economy do not appear to be as strong. The GDP figure for the entire economy showed growth of only 1.2% for the second quarter of this year. While growth for the third quarter will likely be better, the economy is not doing that well for the amount of job growth we have seen in recent years.
Part of the reason for this disconnect is that productivity gains have been depressed. This is in due in part to business investment spending being weak. If businesses are not investing in new equipment or technology it follows that workers will not become more productive.
This lack of productivity growth is part of the reason why wage gains have been relatively low in recent years. However, as the unemployment rate has come down, and there are less available workers, businesses have started to offer better wages to attract workers, irrespective of the productivity issue.
This stronger employment report for the month of July has once again renewed speculation about the Federal Reserve raising interest rates. Most likely we will need to see evidence of other areas of the economy showing strength before the Fed decides to take action.
This employment report should help to reassure those who believed our economy was slowing down. Most likely our economy has not changed in a significant manner, and we will continue to experience the relatively slow to moderate growth that has been typical of recent years.