Kristina Hooper is the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The US job market is getting healthier, but a huge month for job creation and a falling unemployment rate aren’t necessarily enough to trigger a rate hike any sooner.
Last Thursday, we saw a blowout jobs number. The June employment report showed that non-farm payrolls rose 288,000. This pushed the three-month average to a robust 272,000 jobs and it marked the fifth straight month of more than 200,000 new jobs.
Even some areas of significant weakness—namely long-term unemployment—are showing substantial signs of improvement. The percentage of the long-term unemployed, those out of work 27 weeks or longer, has decreased significantly. Indeed, the “persistently unemployed” now stands at 32.8%, down from 34.8% in May and 37% in February. While the persistently unemployed are not back to the 20% level we’ve seen in a more normal labor environment, it’s a big stride in the right direction.
Further, the unemployment rate is now at 6.1%, which is well below the Fed’s former soft target of 6.5%. Some market participants and strategists believe the Fed will raise rates sooner than mid-2015 because of this jobs report. We think that the market is too liberal in its expectations on when the first rate hike will occur. But that’s because we think the Fed will have to react to other economic conditions such as rising inflation. Recall that the PCE price index—the inflation metric followed most closely by the Fed—is now at 1.8% annualized, which is nearing the 2% the Fed’s soft target.
What Lies Beneath
Keep in mind that there still remains room for improvement with the employment situation. The Fed will likely want to continue to support the jobs recovery and try to address these issues, provided that other factors, such as inflation, don’t come into play. Consider the following:
Wage growth, at 2% year-over-year, has been anemic.
This is a very important metric for the Fed because of what it symbolizes about the slack in the job market. If we take the Fed at its word, then the June jobs report, despite its strengths, is unlikely to speed up the Fed’s decision to raise rates.
Labor force participation remains relatively low at 62.8%.
This means there are likely many disaffected workers who have not tried to re-enter the job market.
The quality of the added jobs remains low.
Many of the new jobs created are coming from lower-paying industries, such as retail. And full-time employment continues to elude many Americans. The number of full-time employees actually dropped in June while the number of part-time workers rose significantly. About 30% of people who took part-time jobs did so “involuntarily,” meaning they would prefer full-time work, according to the household survey.
Earlier this year, the Fed changed its criteria for raising the federal funds rate from quantitative targets—6.5% unemployment, for example—to a mosaic of economic data. And for good reason: The FOMC recognized that while unemployment was improving, it did not tell the full story about the health of the job market or the economy in general.
Similarly, the latest jobs report, while impressive given the progress that has been made in employment, is unlikely to significantly impact the Fed’s decision on when to begin raising the fed funds rate. Instead, that decision will be based on a host of factors. However, we will look to Wednesday’s release of the FOMC minutes to reveal more insight into what the Fed is currently thinking.
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