Instant Analysis: June employment report

Scott Anderson
Posted by Scott Anderson
Chief Economist

It has been a long time coming, but we finally got a jobs report that blew away even the most optimistic analyst expectations in June.

Man and woman in corporate attire waiting for job interviews.We had some positive hints from the improvement in initial jobless claims, purchasing manager indexes and solid advances in consumer confidence that the labor market was heating up. Non-farm payrolls jumped 288K on the month; the consensus had been looking for 215K jobs. Our forecast was above consensus at 238K, but the June gain easily exceeded our optimistic expectations.

We also got a bonus upward revision for April and May that added another 29K jobs. The June jobs report revealed a rapidly improving labor market in nearly every dimension. Private jobs increased a solid 262K up from a 224K gain in May.  While manufacturing added the most jobs since February.

Biggest surprise

The biggest surprise for analysts and the markets likely came from the large drop in the U.S. unemployment rate to 6.1% from 6.3% in May. The unemployment rate is now only about a half a percentage point, or less, from the rate economists normally associate with a fully-employed U.S. economy.  We forecast an improvement in the unemployment rate to 6.2% on the month, but the consensus was that the unemployment rate would remain unchanged at 6.3%.

The drop in the unemployment rate came largely from a huge 407K monthly gain in household employment.  The labor force participation rate held at 62.8% where it has been since April while the average duration of unemployment fell to 33.5 weeks from 34.5 weeks.

The earnings data came in about as expected, sticking close to the recent pace of gains.  Average hourly earnings increased 0.2% in June and the year-on-year gains slowed to 2.0%.  While avg. weekly hours held steady at 34.5 hours.  We will be looking for stronger earnings gains in the months ahead as slack in the labor market dissipates and wages start to get bid up a little more than we have seen over the past five years of expansion.

Sector growth    

Job growth was seen in all major job categories in June. Service employment continues to drive the majority of payroll gains, though manufacturing is starting to consistently add more jobs on a monthly basis. Government (+26K), retail trade (+40K), business services (+67K), information (+9K) and financial services (+17K) all saw stronger job gains in June. Education and health (+38K), temporary help (+10K), and leisure and hospitality (+39K) all saw smaller though still respectable net job gains in June.

The manufacturing sector ramped up hiring in June, while construction payroll gains slowed. Construction (+6K) and manufacturing (+16K) both added net jobs last month.

Looking ahead

Bottom line, another rock-solid employment report for June that brings the Fed closer to its goals on full employment. The report fits nicely with our stronger growth outlook for the second quarter and over the balance of the year.  It also matches well with the FOMC’s expectations for the labor market, and likely means more $10 billion dollar reductions in monthly asset purchases at future FOMC meetings.

Markets will be parsing Fed speeches and minutes for any signs that the recent sharp drop in the unemployment rate is changing minds about the timing of the first Fed rate hike or pace of future tightenings. Markets reacted positively to this employment report, stocks were up less than half of a percentage point and the 10-year Treasury yield backed up to 2.67% from 2.62%.

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