Strong jobs report is not enough to ease recession fears

A woman walks past a "Now Hiring" sign as she leaves the Urban Outfitters store at Quincy Market in Boston.
Brian Snyder | Reuters
A woman walks past a "Now Hiring" sign as she leaves the Urban Outfitters store at Quincy Market in Boston.

Nonfarm payrolls rose 287,000 in June, significantly more than expected according to the median consensus on Bloomberg, and certainly a welcome improvement from the minimal rise last month. May, in fact, was revised down further from 38,000 to just 11,000. Taking the Verizon strike into account, adding 35,000 to May and subtracting 35,000 from June, the last two months of payroll gains are more like 46,000 and 252,000 respectively.

Still, the improvement at the end of the second-quarter does little to reinstate a positive trajectory in hiring – remember it's not about just one or two months data, it is about the trend pace. The three-month average rose from 115,000 to 140,000 in June, down markedly, however, from a near 300,000 pace at the end of 2015 when the Fed opted to raise interest rates for the first time in nine years. In other words, while the Fed's preemptive policy adjustment was based on expectations of further improvement in the labor market and inflation, the data have still-failed to evolve as expected.

The unemployment rate ticked up from 4.7 percent to 4.9 percent in June as nearly half a million workers moved back into the labor force – nearly the same amount that dropped out the month prior. Household employment rose, however, by only 67k in June prompting a rise in the unemployment rate, as well as the participation rate from 62.6 percent to 62.7 percent.

Average hourly earnings rose just 0.1 percent in June, enough, however, to boost the annual pace of earnings up to 2.6 percent, a new high for 2016. If sustained, which is itself a big if, positive, above-trend earnings growth would offer the Federal Reserve at least one strong indication of continued improvement in the U.S. labor market. As of late, however, it is still too soon to suggest a sustainable upward trend as wages have been increasingly volatile month-to-month.

Finally, the workweek remains unchanged at 34.4 in June, as if has for the past five months.

Here's the bottom line: Prior to the violent reaction in the financial markets following the Brexit, several Committee members noted the downside risks to the Fed's outlook for growth in economic activity and for further improvement in labor market conditions. This morning's June employment report, while a welcome improvement from a disappointing rise in May, has done little to help quell the Committee's well-founded concerns surrounding labor market strength or the market's concerns of a recession over the next 12-24 months.

After all, although the headline increase in May was severely disappointing and seemingly an anomaly, the pace of hiring has been slowing for some time. Near 300,000 at the end of last year, the three-month average slowed to fewer than 200,000 in the first quarter before dropping to just above 100,000 as of late. Thus, even the outsized nominal rise in June of 287,000, beating market expectations, is not enough to reestablish an improving trend in hiring.

Rather, a still-weakened trajectory will continue to fuel the Committee's concerns surrounding the underlying momentum of the U.S. labor market, and the domestic economy as a whole, into the second-half of the year and beyond, perpetuating the Fed's inability to raise rates anytime soon. In other words, if rates were poised to stay low for longer, the Fed's acknowledgement of recent weakness on the domestic front coupled with global market volatility suggest rates are now likely to be much lower for much, much, much longer.

Commentary by Lindsey Piegza, the chief economist for Stifel, Nicolaus & Company, specializing in the research and analysis of economic trends and activity, world economies, financial markets and fiscal policies. Piegza joined Stifel in 2015 amid the merger with Sterne Agee where she served as chief economist. Previously, Piegza served as the economist for FTN Financial for eight years in NYC. Follow her on Twitter @lindseypiegza.

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