US job strength keeps 2016 rate rise alive

Posted on August 5, 2016

Immigration activists holding an American flag rally outside the U.S. Supreme Court as justices hear arguments in a challenge by 26 states over the constitutionality of President Barack Obama's executive action to defer deportation of certain immigrant children and parents who are in the country illegally in Washington April 18, 2016. REUTERS/Joshua Roberts©Reuters

Hiring by US employers in July crushed analysts’ forecasts for a second month, confirming that the jobs recovery is fully back on track and keeping alive the prospect of a Federal Reserve interest-rate increase later this year.

Payrolls expanded by 255,000 in July, according to the Department of Labor, after growing by an upwardly revised 292,000 the previous month. The July reading easily topped forecasts that payroll growth would come in at 180,000.

    The unemployment rate held steady at 4.9 per cent. The labour force participation rate rose for a second month, reaching 62.8 per cent compared with 62.7 per cent the previous month, as the strong labour market draws more people off the sidelines and into work.

    The Fed has been in a wait-and-see mode in recent months as it weighs mixed readings for the domestic economy and economic and market hazards in Europe and China. A dismal reading in May set alarm bells ringing about the health of the jobs market but the June and July data will together scotch the notion that the employment recovery has hit the buffers.

    Fed policymakers have one more set of jobs figures before their September meeting, which has been earmarked by some economists as a potential moment for a second upward move in rates. They will have to reconcile punchy labour market numbers with subdued activity data, with gross domestic product growth growing at an annualised pace of just 1.2 per cent in the second quarter.

    “The steady job market improvement keeps alive the possibility of the Fed hiking rates again this year,” said Chris Williamson, an economist at IHS Markit. “The problem facing the Fed is that the ongoing robust rate of job creation is taking place against a backdrop of weak output growth, suggesting productivity and profit margins are likely to be suffering.”

    The firm readings sparked speculation that a rate increase as soon as September is becoming more likely. The yield on the policy-sensitive two-year Treasury note jumped 4.7 basis points to 0.69 per cent following the report as traders sold the asset. US stock-index futures rose modestly, while the dollar strengthened against other global currencies.

    The report also helped lift equities, with the S&P 500 hitting a new intraday high, rising 0.7 per cent to 2,179.52.

    Gad Levanon of the Conference Board said: “The strong employment reports in the past two months increase the motivation for the Fed to increase rates in September, though in our view a post-election hike is still more likely.”

    Firm jobs numbers will hearten Democrats who have been attempting to portray an upbeat picture of the US economy as they play up the legacy of the recovery under Barack Obama’s presidency. Donald Trump, the Republican nominee, has been warning of national economic decline, with his campaign suggesting that official unemployment data understate how many people are out of work.

    Jason Furman, chairman of Mr Obama’s Council of Economic Advisers, said the report showed the rate of job creation was “well above the pace needed to maintain a low and stable unemployment rate”.

    The labour market has been one of the strongest pillars of the recovery from the financial crisis, and the July figure represents the third month in a row that the jobless rate has come in below 5 per cent. Many economists think that the employment market has moved close to full employment, with the unemployment rate having fallen to less than half of its 2009 crisis-era high.

    In July job gains occurred in professional and business services, healthcare and financial activities. Less encouragingly, employment in major industries including construction, manufacturing and retail showed little or no change.

    Mining employment has declined by 220,000 jobs, or 26 per cent, since peaking in September 2014 as low oil prices have pushed energy companies to slash investment and headcount.

    Friday’s data confirmed continued steady, if unspectacular, increases in wages. Average hourly earnings grew 2.6 per cent over the year, the Department of Labor said, matching the cyclical high reached in December. That comfortably exceeds the core inflation rate of 1.6 per cent but is still below the rates of wage growth seen before unemployment peaked during the last downturn.

    Tepid salary gains, combined with other factors such as an unusually high proportion of workers employed part time because they could not find full-time work, have led some economists, including Fed chair Janet Yellen, to question whether there is more slack in the labour market than the headline figures suggest.

    The stronger signals on the labour market, combined with disappointing growth in the first half of 2016, will further complicated the Fed’s calculus looking into the autumn. On one hand, central bankers do not want to increase interest rates too quickly and risk sending the recovery veering off course.

    But on the other, since the effects of monetary policy tend to work on a lag, some policymakers worry that not taking action soon enough could allow the economy to overheat and create excess inflation.

    The odds that the Fed will lift interest rates by the end of the year climbed after the July jobs numbers. Traders put the odds that interest rates would rise by December at 46 per cent, up from 37 per cent a day earlier, according to calculations of federal funds futures. The implied probability of a rate rise in September also rose, advancing to 22 per cent from roughly 18 per cent a day earlier.

    Almost three-quarters of economists surveyed by the Financial Times at the end of July said they expected the US central bank to tighten policy once more this year, with the majority expecting the change in December.

    Additional reporting by Eric Platt

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