Jobs Report Blows Past Highest Estimate, Wage Growth Still Cool, Unemployment Rate Ticks Higher

Anyone who came into Friday expecting the June jobs report to show a marked pickup in hiring from May’s lackluster pace were vindicated.

The headline print is a blockbuster 224k, better than the highest estimate among 75 economists, and well ahead of consensus, which was looking for 160k. April and May were revised lower (slightly) to 216k and 72k, respectively. The manufacturing sector added 17k jobs, the most since January.

Employment growth has averaged 172,000 in 2019. That’s down from an average monthly gain of 223k last year.

Meanwhile, average hourly earnings missed, printing 0.2% MoM (est. 0.3%) and holding steady at 3.1% YoY. The unemployment rate ticked up to 3.7%.

On balance, the report probably isn’t enough to tip the scales against a July rate cut, but it doesn’t bolster the case for easing, either. Although 224k doesn’t exactly scream “emergency”, the cooler-than-expected AHE print helps make the case that inflation isn’t about to take off. The knee-jerk reaction in equities was lower, underscoring concerns that the Powell Fed might read this as a sign that it’s too early to move.

May’s disappointing report cast considerable doubt on whether the labor market would remain bulletproof as the trade tensions and global factory slump boomerang back to the US. A string of recent data disappointments including myriad signs of manufacturing weakness appeared to vindicate those who have variously suggested that once the boost from fiscal stimulus wanes, the US economy will no longer be immune to weakness abroad.

That said, most expected a rebound in hiring last month. “While the return of the trade war appears to be affecting the labor market, we think the May report reflected an even larger drag from seasonal labor supply constraints that should ease substantially in tomorrow’s report”, Goldman wrote, headed into Friday.

Of course, June was defined by trade tensions but, ironically, the prospect of an all-out trade war helped bolster the case for Fed cuts and thereby stocks, which rebounded from a terrible May to close out H1 on a resoundingly positive note.

The Trump administration has been careful to play down any and all signs of economic deceleration for fear of undermining the MAGA mythos just as Democrats hit the campaign trail. The economy will play heavily in Trump’s reelection chances, and some heavyweights have suggested a recession or a stock market crash would be a veritable death knell for the president’s 2020 chances. Jeff Gundlach, for instance, recently went so far as to say that Trump may not even run if the economy were to careen into a recession.

With the economy slowing and the yield curve seemingly pointing to a downturn in the not-so-distant future, the Fed is expected to play a big role in the election cycle, whether they like it or not. The case for so-called “insurance cuts” grows with each passing disappointment on the data front, which has led to the return of a familiar post-crisis dynamic, wherein good economic news is sometimes interpreted as “bad” by risk assets (e.g., stocks) because it ostensibly reduces the chances of rate cuts and dovish monetary policy.

Trump is acutely aware of that dynamic and is thereby walking a fine line – playing up the strength of the economy argues against the rate cuts he so desperately wants.

In that regard, the June payrolls report presents something of a communications challenge.

Markets are looking for a preemptive July cut from Jerome Powell and around 100bps worth of easing over the next year. In the immediate aftermath of the June report, Fed easing odds were pared.

Actual

• U.S. June Nonfarm Payrolls Rose 224k; Unemp. Rate at 3.7%
• Nonfarm payrolls, net revisions, -11k from prior two months
• Participation rate 62.9% vs prior 62.8%
• Avg. hourly earnings 0.2% m/m, est. 0.3%, prior 0.3%
  • Y/y 3.1%, prior 3.1% est. 3.2%
• Nonfarm private payrolls rose 191k vs prior 83k; est. 150k, range 111k-215k from 31 economists surveyed
• Manufacturing payrolls rose 17k after rising 3k in the prior month; economists estimated 3k, range -1k to 8k from 17 economists surveyed
• Unemployment rate 3.7% vs prior 3.6%; est. 3.6%, range 3.5%-3.7% from 71 economists surveyed
• Underemployment rate 7.2% vs prior 7.1%
• Change in household employment 247k vs prior 113k

Estimates and priors

• Change in Nonfarm Payrolls, est. 160,000, prior 75,000
• Change in Private Payrolls, est. 150,000, prior 90,000
• Change in Manufact. Payrolls, est. 3,000, prior 3,000
• Unemployment Rate, est. 3.6%, prior 3.6%
• Average Hourly Earnings MoM, est. 0.3%, prior 0.2%
• Average Hourly Earnings YoY, est. 3.2%, prior 3.1%
• Average Weekly Hours All Employees, est. 34.4, prior 34.4
• Labor Force Participation Rate, est. 62.8%, prior 62.8%
• Underemployment Rate, prior 7.1%