June employment report a mixed bag

The June employment report was overall slightly on the weak side of expectations. Another 223,000 was added to US employment in June and the unemployment rate declined two notches to 5.3%. However, net revisions to April and May were -60,000 and average hourly earnings were flat on the month, with May growth revised down to 0.2% m/m from 0.3% m/m. This means that annual wage growth is now at only 2.0% compared with 2.3% in May and the gap between the wage measure in the Employment Cost Index and average hourly earnings is even wider.

The unemployment rate declined to 5.3% but this is was all due to a plunge in the labour force of 432,000 as the participation rated fell to 62.6%, from 62.9% – the lowest in this cycle. Employment in the household survey declined 56,000 but generally the measures in the household survey should be taken with a pinch of salt as the monthly volatility is high.

With average hourly earnings growth still subdued and total hours worked growing a modest 1.1% annualised over the past three months, our income proxy suggests that household income growth slowed in Q2. However, with households still having a buffer from increased savings in Q1, this should dampen the impact on private consumption growth.

Turning to the details of the report, the main revision in May and April was to government employment, which accounted for almost half the overall revision. Government employment was also flat in June. Construction employment was also surprisingly weak, with no job growth in June, while trade and transport, business services and leisure and hospitality continue to see strong job growth. Manufacturing employment also remained in positive territory adding 4,000 new jobs.

Recent US data has generally supported our view that US growth should pick up in the current and coming quarters. If our forecast is right, this should support job growth at an above 200,000 average in coming months, push the unemployment rate lower and put upward pressure on wages. Notably, our US wage indicator continues to suggest a substantial pickup in wage inflation in coming months.

The three-month average in private payrolls is now at 221,000 and, in itself, the June employment report leaves the door open for a first rate hike in September. The big unknown is how Greece will develop and if financial conditions worsen over the summer this is likely to postpone a first rate hike. In addition, the fall in the growth pace of average hourly earnings also takes some pressure off the Fed but these data are volatile and we could easily see a rebound in July.