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Friday, July 8, 2016

Bernstein: Jobs Report: June’s big number reveals welcome bounceback, but you’ve gotta smooth these noisy data.

Jobs Report: June's big number reveals welcome bounceback, but you've gotta smooth these noisy data.

July 8th, 2016 at 10:11 am

[Before I jump into analysis of the jobs report, I'm compelled to add a brief note about the violence and deaths in Dallas last night and the deaths of Alton Sterling and Philando Castile earlier this week. I will not try to hold forth on these tragedies other than to say that I'm both indelibly saddened and deeply enraged. That said, I'm sure my pain and anger are a fraction of that of many others directly affected by these murders. My heart goes out to all the victims.]

Payrolls posted a big 287,000 jump in June in stark contrast to revised gains of just 11,000 in May. Such monthly volatility provides an extremely clear example of why we should never over-interpret one month's worth of jobs data. You have to "smooth," or average out the gains over numerous months, as I do below. When you do so, you get a picture of a solid job market, adding somewhat fewer jobs than a year ago, but still making progress towards full employment.

The unemployment rate ticked up to 4.9% as more people entered the labor market, leading to a small but welcome uptick in the participation rate, up one-tenth to 62.7%. Year-over-year wage growth ticked up slightly as well, from 2.5% to 2.6%, a positive sign that some of the benefits of the ongoing recovery are finally reaching workers' paychecks. As shown below, this pace of wage growth remains well below Fed chair Yellen's benchmark target of 3.5%. In other words, this trend should be very much welcomed, not feared! It's what's supposed to happen as the job market improves and working people get a little more bargaining power.

The punchlines are thus as follows: May's dismal report was an outlier; the US recovery proceeds apace; Brexit hasn't shown up in the jobs numbers; wage growth is slowly picking up a bit of speed, as I'd expect; and the job growth engine has downshifted from around 200K/month to around 150K/month, once you smooth out the monthly noise. That's also to be expected as we get closer to full employment, though given that we're not there yet, both monetary and fiscal policy needs to continue to be as pro-growth as possible. This policy stance is underscored by the absence of inflationary pressures.

JB's patented monthly smoother is particularly important this month. The monthly trend job gains over the past 3 months is about 150K, 6 months: ~170K; 12 months: ~200K. There's the downshift noted above.

Source: my analysis of BLS data.

Source: my analysis of BLS data.

A few other highlights from the report:

–The underemployment rate ticked down from 9.7% to 9.6%, but this more comprehensive measure of labor market slack (it includes part-time workers who'd rather be working full-time and those "marginally attached" to the labor force) shows we're not yet at full employment, which calls for an underemployment rate about a full point lower.

–As noted, there's a positive trend in average hourly earnings (see figure below). But note also Chair Yellen's wage benchmark of 3.5% shown in the figure. There's considerable room for wages to continue to accelerate. Those calling on the Fed to raise rates and thwart this trend are both wrong on the substance—wage-growth is not pushing up price growth—and implicitly suggesting that those who've gained the least from the recovery thus far need to take a hit. This, in my view, is the monetary policy version of "the system is rigged."

Source: BLS

Source: BLS

–After losing 16,000 jobs in May, manufacturing rebounded in June, adding 14,000 factory jobs.  Smoothing over recent months, employment in the sector is down 4,000 jobs/month this year, compared to +10K/month in 2014-15. This reversal is partly a function of the stronger dollar, which makes our manufactured exports less competitive, leading to larger trade deficits. More broadly, it reinforces the need for better rules of the road in our trade deals, a topic that's become highly elevated in the presidential campaign.

Federal Reserve economists are just as good at taking averages as I am, and thus I'm very confident the Fed won't overreact to the big June jobs number and resume their rate normalization campaign. Brexit uncertainty, the risk of further strengthening of the dollar, and labor market volatility all push against an interest rate increase. Once you average over the past few months, choppy waters smooth out a bit, suggesting a generally solid, ongoing labor market recovery.

John Case
Harpers Ferry, WV

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