Jobs Report: Headline Beats, Hourly Earnings Miss, Unemployment Rate Moves Up To 4%

Unlike last month, Donald Trump didn’t tweet out the jobs report an hour ahead of time on Friday, so that’s disappointing.

As a reminder, here’s what he did ahead of May payrolls:

Looking forward to seeing the employment numbers at 8:30 this morning.

— Donald J. Trump (@realDonaldTrump) June 1, 2018

If that were anyone but Trump, the SEC would have been knocking.

The June report comes on the heels of the Fed minutes which found the FOMC describing the U.S. economy as “very strong”. That, along with the expectation that inflation should run at 2% over the medium term, prompted the following assessment of the rate path:

[It’s] likely appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020.

There was also a bit of consternation about the prospect that the economy is set to overheat. To wit, from the minutes:

Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.

So they’re hawkish – I guess. But there was the obligatory nod to the flattening curve and there was some discussion of trade tensions which they described as “intensifying.”

That’s the policy backdrop for June payrolls. Last month’s report was of course a blockbuster and today’s numbers will be analyzed in the context of the U.S.-centric growth narrative. Here’s Goldman’s prediction:

We estimate nonfarm payrolls increased 200k in June. Our forecast reflects the continued strength of jobless claims and our services employment tracker reapproaching its cycle high. After a one tenth decline in May, we expect the unemployment rate to fall another tenth to 3.7%, reflecting the further decline in continuing claims over the payroll month. Finally, we expect average hourly earnings to increase 0.3% month over month and 2.8% year over year, reflecting favorable calendar effects.

And here’s BofAML:

We forecast that nonfarm payrolls increased by 205k and private payrolls increased by 200k in June, in line with the six-month moving average of payrolls, which currently stands at 202k, suggesting that job growth remains steady at elevated levels.

We look for wage growth to continue to trend higher and expect average hourly earnings to grow by 0.3% mom in June, which should lead the year-over-year growth rate to move up to 2.8% from 2.7%. Our forecast is supported by further evidence of labor market tightening in the data. For example, according to the latest reading of the JOLTS data, job openings currently outpace the number of unemployed in the labor market. Also, the Conference Board’s labor market differential index currently stands at 25.1, suggesting that consumers, on balance, believe that labor market conditions favor the job seeker.

BNP’s take is similar and here are the visuals, for anyone who might find them useful:

Signs of wage inflation should be watched closely, especially ahead of earnings season. There are good reasons to believe margins have peaked, so in addition to emboldening an already hawkishly-inclined Fed, hotter-than-expected wage growth could begin to eat away at corporate bottom lines.

In any event, here are the expectations and priors:

• Change in Nonfarm Payrolls, est. 195,000, prior 223,000
• Two-Month Payroll Net Revision, prior 15,000
• Change in Private Payrolls, est. 190,000, prior 218,000
• Change in Manufact. Payrolls, est. 15,000, prior 18,000
• Unemployment Rate, est. 3.8%, prior 3.8%
• Underemployment Rate, prior 7.6%
• Average Hourly Earnings MoM, est. 0.3%, prior 0.3%
• Average Hourly Earnings YoY, est. 2.8%, prior 2.7%
• Average Weekly Hours All Employees, est. 34.5, prior 34.5
• Labor Force Participation Rate, est. 62.7%, prior 62.7%

And here are the numbers:

• U.S. June Nonfarm Payrolls Rose 213k

• Nonfarm payrolls, net revisions, 37k from prior two months
• Participation rate 62.9% vs prior 62.7%
• Avg. hourly earnings 0.2% m/m, est. 0.3%, prior 0.3%
  • Y/y 2.7%, prior 2.7% est. 2.8%
• Nonfarm private payrolls rose 202k vs prior 239k; est. 190k, range 125k-247k from 31 economists surveyed
• Manufacturing payrolls rose 36k after rising 19k in the prior month; economists estimated 15k, range 10k to 36k from 18 economists surveyed
• Unemployment rate 4% vs prior 3.8%; est. 3.8%, range 3.7%-3.9% from 75 economists surveyed
• Underemployment rate 7.8% vs prior 7.6%
• Change in household employment 102k vs prior 293k

So that’s a beat on the headline, but a miss on AHE, which would seem to suggest that there’s still some slack and that the economy is absorbing it.

10Y yields dipped on the slower-than-expected pace of wage growth and I suppose that 2.7% YoY print will be something of a relief for the Fed to the extent it doesn’t back them any further into a corner but suggests there’s been no marked deterioration.

The uptick in the unemployment rate was the first in more than a year.

The spike in the unemployment rate was driven entirely by the long-term unemployed; those unemployed 27 weeks or longer rose by 289k or 24.3%, the most since the 1970s. That's a *huge* outlier. pic.twitter.com/jkndDSKKDL

— George Pearkes (@pearkes) July 6, 2018

The 36,000 manufacturing jobs created will probably make Trump happy – that looks like the biggest increase in that sector in at least six months.

Oh, and Rosie the Riveter is back, apparently:

Biggest one-month jump in prime age women's labor force participation rate since 1994. pic.twitter.com/OhJddJLxcv

— Luke Kawa (@LJKawa) July 6, 2018