The Labor Department released its monthly non-farm payrolls report this morning, indicating that employers added 215,000 new jobs during the month of July. While this fell short of June’s 231,000 jobs added and missed projections by about 10,000 jobs, it still seemed to indicate to analysts that the labor market was improving gradually. U3 unemployment remained near 5.3%, still just above the Federal Reserve’s target rate for “full employment.”
Labor Participation Holds
Despite the broad-based gains in the jobs market, the overall labor participation rate—which expresses the proportion of the labor force that is employed or actively seeking employment—still held at just 62.6%, its lowest in four decades. When parsing the government employment statistics, this piece of datum stands out as a potential cause for concern. The BLS prefers the U3 unemployment measure (5.3%), though the far more inclusive U6 unemployment rate is nearly double, at 10.4%.
Weak Wage Growth
The NFP report also showed that average hourly wages during July were 2.1% higher year-over-year (falling short of expectations) and only improved 0.2% from June. In spite of the momentum in some Democrat stronghold Blue states for increasing the minimum wage to as much as $15 per hour, the 2.1% annualized gain in employee compensation is still woefully short of the 3.5% target that the Fed sets as its gauge of healthy wage growth.
The stagnation in wages has been an ongoing problem in the U.S., to this point masked by commodity prices being stuck in the downturn of their cycle. While the media touted the benefits of cheaper energy costs for American consumers, and how this would be felt as a sort of “de facto wage increase” around the country, this sort of thinking ignores the cyclical nature of commodity prices. (Wasn’t it just a year ago that crude oil was trading above $110 per barrel?) When crucial raw commodity prices begin to recover, this will make the lack of growth in wages even more painful for consumers.
Implications for the Fed?
Speaking of the Federal Reserve, one of the keys to its plans for an increase in the federal funds rate this year (whether in September or December) has been the U.S. economy getting on track for sustained growth and full utilization of the labor force. July’s NFP numbers seem to indicate to many that the chances of a September rate hike are improving.
Yet, the job market is far from the only criterion that the central bank will be looking at to make its decision about interest rates. They must also balance the relative strength of the dollar, which is eating into profits for American corporations overseas and generally dragging on exports. This has helped balloon the trade deficit by 7% in July, making it even harder for the FOMC to raise rates, as this is undoubtedly will boost the dollar even higher. With no other options to combat the rising dollar, many companies will be forced to layoff workers and cut expenditures as a means of remaining profitable.
While the markets continue to “price in” a rate increase from the Fed this year, such a move could have dire implications that spillover into the labor market. Don’t be shocked if the Fed finds a rationale for keeping interest rates near zero for longer based on these risks.