The June employment report offered a couple of surprises, but there was no indication of a letup in the underlying strength of the labor market. Overall, it was a strong report that reinforces the strong inclination of the FOMC to maintain a gradual pace of rate hikes and is consistent with our own view that there will be four hikes this year.
The most important message in this report was that job growth remains robust. Payrolls increased a better-than-expected 213K in June, and there were upward revisions to April and May totaling 37K. We will likely revise up our projection for payrolls in the near term, as we (and likely the FOMC) were expecting a moderation to a monthly pace under 200K.
The most eye-catching part of the report was the two-tenth increase in the unemployment rate, to 4.0%. That there was a rise in the unemployment rate was no surprise, however, as it followed an unexpectedly large decline over the previous two months. While the increase was slightly greater than the one-tenth increase we’d anticipated, it’s no cause for concern, particularly because it was driven by a two-tenth increase in the participation rate. We will now pencil in a decline in the unemployment rate in the near term of a tenth, with no change beyond that. We will also take a tenth off the participation rate in the near term and leave our medium-term forecast unchanged. We continue to expect the unemployment rate to reach 3½% by the second half of 2019.
Average hourly earnings posted a 0.19% increase in June, slightly softer than the consensus expectation, and the 12-month change still rounds to 2.7% (2.71% to 2.74% now). We don’t find this surprising. There has been some firming in wages relative to earlier in the expansion, and a gradual upward trend remains in place. This simply reinforces the FOMC’s view that the uptrend will continue to be gradual.
The strength of employment growth in June is consistent with our expectation that growth was very strong in Q2, likely at least 3½%. The strong gain in manufacturing employment portends a strong reading for industrial production in June. And the effect of the fiscal stimulus will keep growing strong in the second half of 2018 and into 2019. For the FOMC, there is some urgency to remove the remaining accommodation.