US jobs strength only complicates Fed decision-making

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  • An impressive gain in non-farm payrolls during June 2016 takes the six-month average to a respectable 172,000
  • Employment strength shows the US economy had positive momentum before the UK Brexit vote
  • May’s abysmal jobs report and recent slowing in employment growth now look ‘transitory’ indeed
  • Employment growth in June shakes Fed decision-making on cautious rate rises.


After May’s abysmal employment report reflected the weakest job growth in more than five years, June’s report (published 8 July 2016) reversed the downward trend and ended the second quarter of 2016 on a high note. In addition to recouping the 35 000 striking Verizon workers from the information segment last month, the non-farm payroll gain of 287 000 workers reflected broad-based improvement across healthcare, leisure, business services, retail and transportation. The June hiring takes the three-month average to 147 000 jobs per month and the six-month average to 172 000. Both are solid increases, but still a downshift from the 2015 average of 230 000.


The unemployment rate rose to 4.9% from the 4.7% low in May. The good news in the household survey is that the labour force grew by 414 000 as more job seekers entered the workforce. This is typically viewed as a sign of confidence in the economy and it pushed the participation rate up to 62.7%. Average hourly earnings edged up by 0.1%, rising by 2.6% year-on-year. Overall, June’s employment data reflected strength in the US job markets and positive momentum for the economy before the UK referendum. [divider] [/divider]

Exhibit 1: The non-farms payroll report for June 2016 showed a sharp increase in jobs created and is in sharp contrast to the weak report for US employment growth in May 2016

Fed decision-making


According to the Federal Open Market Committee (FOMC) forecasts in the Summary of Economic Projections, the Federal Reserve anticipates ‘gradual removal of policy accommodation’ and two 25bp rate increases by the end of 2016.  After the latest employment data, market-based estimates of the probability of future hikes doubled for December and February, but are still at only 24%, compared to the more than 75% probability of a hike at the beginning of June.


Weakening employment growth was one of a number of uncertainties that the Fed mentioned in the latest FOMC minutes as justification for proceeding cautiously in raising interest rates.  Fed Chair Yellen specifically commented on the peril of relying too much on one economic data release and it was her hope that the slowing in May would prove to be ‘transitory’. Ironically, while Fed officials undoubtedly wanted to see strong data to improve momentum for the US economy, this latest jobs report will likely complicate decision-making at the Fed as it continues to weigh the uncertainty after the Brexit vote, the outlook for global growth and overall financial conditions. [divider] [/divider]

This article was written in New York City on 8 July 2016

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