Today’s bullish June jobs report smashed everyone’s expectations, and left even the most sceptical economists feeling optimistic.
But there were definitely plenty of interesting nuggets from the report worth addressing.
For instance, UBS’s Drew Matus noted that the increase in wages was interesting when you consider the fact that growth in low-wage jobs continues to outpace growth in high-wage jobs.
This suggests tight labour market conditions, which could ignite wages and ultimately inflation.
Here’s Matus (emphasis added):
The faster payroll earnings growth is despite a compositional shift in employment growth toward lower wage industries. Through March, employment growth was about as fast in high wage industries as in low wage industries. But since then, low-wage industry employment has gone up at a 3.1% annual rate and high-wage only at a 1.3% annual rate (see chart). That shift is probably positive for pulling the long-term unemployed back into employment. It’s interesting, though, that average hourly earnings growth has actually accelerated even as hiring has shifted toward lower-wage industries and implies perhaps a bit more wage pressure and a bit less slack in the labour market than the Fed is anticipating.
Our expected 7.0% unemployment rate for year end would put the unemployment rate at our estimate of the non-accelerating inflationary rate of unemployment, or NAIRU. This is the level of unemployment consistent with a lack of inflation pressures. As noted, earnings gains suggest some tightness in the labour market even at an unemployment rate of 7.6%. While one month’s data does not prove the point, it does remind us that, given the level of accommodation the Fed is providing, we should be mindful of anything that might suggest inflation pressures could be building. One key signpost we will watch is the Employment Cost Index (due out July 31), adjusted for the mix shift in employment.
Economist David Rosenberg has written quite a bit about the areas of the economy where the labour supply may be tight. As companies go after a shrinking pool of workers, wages will rise, putting a strain on profit margins, and potentially creating a problem for stocks.
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