Popular Economics Weekly
The U.S. pumped out another 215,000 new jobs in July, but it doesn’t look like this is enough to convince the Fed to begin to raise rates in September. Workers still aren’t getting decent raises and millions of Americans are working parttime, or have stopped looking for work.
The steady flow of new jobs during the late spring and summer offer some evidence the economy is moving again after growth slipped earlier in the year during a harsh winter, for the second successive winter. The U.S. has added an average of 235,000 jobs a month since May, up sharply from a 195,000 pace in the first quarter.
The numbers are good, but neither wages nor inflation are rising enough to show any sign of 3 percent plus GDP growth, which is what it takes to reach full employment. Non-farm payrolls rose just about as expected, up 215,000 in July with upward revisions adding 14,000 to the prior two months. But the unemployment rate is unchanged at 5.3 percent.
Wages show some traction, up 0.2 percent in the month with the year-on-year rate over 2 percent at 2.1 percent. The average workweek is up, rising to 34.6 hours from a long run at 34.5. The labor force participation rate, which dropped sharply in June, held at 62.6 percent.
But, the employment cost index that measures both income and worker benefits rose only 0.2 percent in the second quarter, far below expectations and the lowest result in the 33-year history of the report. Year-on-year, the ECI fell 6 tenths to plus 2.0 percent which is among the lowest readings on record.
Why is the question plaguing economists. The Fed’s Vice-Chairman Stanley Fischer believes it is temporary, due to the oil glut and falling energy prices. "The interesting situation in which we are is that employment has been rising pretty fast relative to previous performance and yet inflation is very low. And the concern about the situation is not to move before we see inflation as well as employment returning to more normal levels," he said.
The record ECI low is plus 1.4 percent back in the early recovery days of 2009 when, apparently unlike today, there was enormous slack in the labor market. The ECI's two components both fell back sharply with wages & salaries moving down to plus 0.2 percent from 0.7 percent in the first quarter and benefits to plus 0.1 percent vs the first quarter's plus 0.6 percent. Year-on-year, wages & salaries are up 2.1 percent with benefits, despite Obamacare, below the 2 percent threshold at 1.8 percent. The data are a reminder of the big decline in average hourly earnings during June, which fell 3 tenths from May to 2 percent even.
Other details in the employment report look surprisingly solid with payrolls rising 60,000 in trade & transportation, for a third straight strong gain, and professional & business services rising 40,000 to extend their long healthy run. Retailers continue to add jobs, up 36,000 for their third straight strong gain with the motor vehicle subset up 13,000 and reflecting the strength of car sales. Manufacturing, which is usually weak, rose a notable 15,000 in the month with construction, where lack of skilled labor is being reported, showing a modest gain of 6,000.
Why won’t the Fed from a September rate hike? Inflation is still too low, in part because wages and salaries aren’t yet rising. Inflation in June as measured by the core PCE price index, rose only 0.1 percent for a very low 1.3 percent year-on-year rate that won't be moving up expectations for the Federal Reserve's rate hike. The year-on-year rate is at a 4-1/2-year low and has remained below 1.5 percent since November. The overall price index rose 0.2 percent in June with its year-on-year rate, reflecting the collapse in oil prices, at only plus 0.3 percent.
So the collapse in oil prices, and Iran Nuclear deal seem to be keeping more than inflation in check. It is reducing employment in the energy sector, though helping consumers in other ways. So other areas in the economy will have to take up the slack.
Harlan Green © 2015
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