The U.S. economy generated a robust 850,000 jobs in June while the unemployment rate advanced to 5.9% amid an increase of 151,602 workers in the labor force, according to government data released Friday.
This combination of job generation and workers returning is a good thing and illustrates that the growing confidence of those looking for work at higher wages is well-placed.
In addition, the surge of 343,000 jobs in leisure and hospitality should ease fears that government policy is inhibiting the return of workers to the labor force.
Hiring was strong across higher-paying sectors including goods-producing, manufacturing, education and health care jobs, as well as the service sector, where workers are returning to the labor market and are clearly demanding greater pay.
On a three-month average annualized pace, average hourly earnings are rising at a 4.4% pace while aggregate hours worked increased by 0.2%, both of which bode well this summer and into the holiday season for what is going to be one of the strongest periods of demand for services in our lifetimes.
The surge of 343,000 jobs in leisure and hospitality should ease fears that government policy is inhibiting the return of workers.
On the publication of the jobs report, the 10-year Treasury yield declined to 1.42%, which we take as investors adjusting expectations around the inflationary implications of the data.
It is clear that the market now sees only a transitory increase in pricing, which we expect to begin abating in the fall. This in our estimation is a shift in the balance of opinion around what can best be described as good inflation, linked to rising wages for those at the bottom of the income ladder.
Throughout the first six months of the year, the economy has produced 2.7 million new jobs, or an average of 543,000 per month, and the unemployment rate has declined from 6.3% to 5.9%.
While the economy remains 6.8 million jobs short of where it was before the pandemic, we expect that conditions approximating full employment will be achieved by late 2022, which will set the stage for the end of central bank asset purchases by the end of that year and the gradual normalization of policy. In 2023, we expect 25 basis-point hikes in the federal funds rate in September and December.
Employment and wage gains throughout the first six months of the year have been nothing short of impressive. If on the Fourth of July weekend one cannot appreciate a strong jobs market, robust consumer confidence and solid wage gains following the pandemic era, it is likely that it has little to do with economic or financial conditions. Instead, it most likely has more to do with profound structural changes inside the domestic economy that are generating a redistribution of power, privilege and influence.
Policy impact
The increase of 865,000 in total employment over the past two months will bolster the accelerating conversation among Federal Reserve policymakers around the tapering of the $120 billion in monthly asset purchases amid a strong jobs market, rising wages and froth in both the housing market and domestic financial conditions.
While we would make the case that tapering does not equate with tightening, given current U.S. economic conditions it is appropriate that policymakers begin to prepare the public for a slowing in the pace of accommodation. In our estimation, it is likely that the central bank will begin pulling back on the purchase of mortgage-backed securities early next year.
Wages gains and the economy
To be sure, there is plenty of work available as implied by the 9.3 million job openings reported through May. Rather, workers have decided, after four decades of wage stagnation and widening inequality, that the time has come for conditions at the bottom of the labor market to change.
The data, which almost certainly reflects wage gains among that cohort, speak to the policy changes that have been sustained throughout the pandemic that have sought to put a floor under the poor, working and middle classes.
Yes, aggregate demand is outpacing aggregate supply, and that has put pressure on firms to finally raise wages among those who provide services to the majority of the public. But the $17 per hour that firms in Austin, Tex., are offering as starting pay for line cooks, for example, has little to do with the special supplemental $300 per week in unemployment insurance paid by the federal government or a sudden increase in demand for carne asada tacos.
It has to do with the shock unleashed by the pandemic, a change in behavior among workers at the bottom of the income ladder and the recognition among firms that populate Main Street and the American real economy that the wage and labor status quo that prevailed before the pandemic is history.
We are entering a new era when the equation between labor and management has changed, and it is not surprising that the data is reflecting that shift as policymakers adjust to those changes.
Beneath the headlines
Hiring remained robust as 662,000 new jobs in the private sector were created, with 642,000 in the service sector. There were 20,000 goods-producing jobs created. The only real blemish was a decline of 7,000 in construction jobs, which we think is related to still-elevated costs of materials that have delayed the much-needed construction of new homes.
Trade and transport jobs advanced by 99,000, retail trade by 67,000, business services by 67,000 and information jobs by 14,000. Temporary positions increased by 33,000 and government jobs increased by 188,000.
The labor force participation rate remained unchanged at 61.6% as did the employment ratio, which held at 58%. Median duration of unemployment increased to 19.8% and those facing involuntary part-time employment declined from 5.2 million in May to 4.6 million in June. The latter is a solid sign of the growing strength in the American labor force and underscores the growing bargaining power of labor.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
