Two Cheers for the Employment Report

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 7, 2014 10:16:00 AM

and tagged Commentary, Employment

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employment reportThe string of 200,000-plus employment reports just got a little longer.

The number at the end of last week—288,000 new jobs—far surpassed the expected level of 215,000. It’s also well above the figures for the preceding months, which were themselves strong. The consistency of the gains provides further support for their durability.

Widespread good news

Based on revised numbers from last month, private jobs jumped from 224,000 to 262,000. The overall increase, from 224,000 to 288,000, indicates that government jobs increased from a gain of zero to a gain of 26,000. This is a big shift for a sector that’s been an employment detractor over the past several years, and should signal even faster increases in the future. 

Adding to the good news were upward revisions for the prior months, which contributed another 29,000 jobs to the mix. Looking at unrevised numbers for June, the gains are even bigger.

The supporting data was generally strong:

  • Hours worked remained at the same strong level from the previous month.
  • In the household survey, employment increased by an even bigger 447,000. Combined with much smaller labor force growth of 81,000, this drove the unemployment rate down from 6.3 percent to a near 6-year low of 6.1 percent.
  • The underemployment rate also fell a bit, from 12.2 percent to 12.1 percent.
So, why only two cheers?

Despite all this good news, there’s a problem with wage growth. While employment gains have been accelerating—and should continue to do so—average wages aren’t growing nearly as fast. Wage growth on a month-to-month basis was flat; on a year-to-year basis, it actually decreased slightly, from 2.2 percent to 2.1 percent.

Here’s why wage growth matters:

  • First, with inflation slowly rising, even a flat rate of wage increases means a smaller increase in real purchasing power.
  • Second, if the employment picture is improving as fast as the numbers seem to suggest, then wage growth should be increasing.
  • Third, wages are what fuel consumer spending, which is over two-thirds of the economy. No wage growth, no economic growth.
Why I’m not really concerned—yet

The increasingly good economic news over the past couple of months has been accompanied by weaker-than-expected consumer confidence and spending. Part of what’s driving that is certainly an increase in gas prices; publicity about the weak first quarter is probably involved as well.

We should also keep in mind that wage growth is a lagging indicator, as it always follows employment gains. Further, subsets of wage income, which cover the majority of the workforce, are growing faster than the headline numberas is total wage income, when you combine hours worked with average wages.

All in all, you can make a good argument that the current situation is nothing to worry about.

I agree with that argument, for now. The real crunch will come in the next couple of months, as we see whether wage growth and consumer spending start to grow faster—or not. I expect those numbers to pick up, but if they don’t, we’ll need to take a much harder look at why.

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