By Michael Englund and Rick MacDonald
You can't win them all. After an outsize gain in May, the number of new jobs added by the U.S. economy in June was something of a disappointment. The headline nonfarm payroll figure for the month's employment report, released July 8, showed a gain of 146,000 jobs, well below economists' median forecast of an increase of 190,000 and Action Economics' own expectation of a 225,000 rise.
The rest of the report contained encouraging news for the economy, starting with revisions to the data in prior months. May's increase was bumped up to 104,000, from 78,000, and April's gain was revised up to 292,000, from 274,000. Looking beyond the monthly gyrations, payrolls show a healthy growth trend: The latest revisions leave an average 2005 payroll gain of 181,000, just about level with the average monthly gain of 183,000 for 2004.
WEAK FACTORY DATA.
Meanwhile, another key component of the report, the unemployment rate, decreased to 5% in June, from 5.1% in May, better than the median expectation of an unchanged reading. The average workweek held at downwardly revised 33.7 hours, vs. the median forecast of 33.8. Average hourly earnings rose 0.2% (median 0.2%), which left the aggregate earnings reading rising at a 2.6% year-over-year rate on a nominal basis.
Despite the disappointment in the headline figures, the strength in other employment data has left our view intact that the labor market continues to post healthy growth. However, there's one glaring exception -- the manufacturing sector. The factory payroll data for June proved surprisingly weak, with a 24,000 drop in factory jobs alongside a flat workweek at 40.4 hours, while the overtime reading stayed unchanged at 4.4 hours. The weakness may be explained in part by a relatively sharp but concentrated inventory correction over the February-May period that had a negative impact on many companies within the sector.
The overall mix of data had little impact on other forecasts for June data. We now expect a 0.8% gain in the industrial production report for the month (scheduled for release July 15) and a 0.4% gain in personal income for June (to be released Aug. 2).
TIGHTENING LABOR MARKET.
Unseasonably warm weather, surging utility output, and sales strength were all concentrated in the second half of the month, and this may have missed the period during which the Bureau of Labor Statistics gathered its data for the June jobs report even though it impacted the other data available for the month. With the projected June gains, industrial production likely grew at only a 2% rate in the second quarter, while personal income grew at a 5.7% rate.
The hours-worked index, which gauges the economy's total work hours each month and is a measure of the total labor input to production, still grew at a hefty 2.8% rate in the second quarter. This is the strongest quarter of expansion since the fourth quarter of 1999 and, on its own, would translate to an annual growth rate in U.S. gross domestic product of around 5%, despite our own 2.7% estimate. The employment numbers here often don't line up well with the quarterly GDP growth swings, but this solid hours-worked trend certainly bodes well for the firmness of economic expansion through the second quarter.
In total, employment gains likely ended the second quarter on a solid note despite the disappointing June payroll figure, given the full array of indicators that suggested a tightening labor market and the strong close for the month. We'll assume strength in the July and August jobs numbers, as payrolls catch up with other labor market measures.
Finally, what might Alan Greenspan & Co. make of the latest job numbers? We believe the solid but unspectacular June employment report will keep the Federal Reserve on track for measured rate hikes through the rest of the year. We continue to expect that the Fed funds target rate will reach 4% by yearend, from 3.25% currently.
Englund is chief economist and MacDonald, director of global investment research and analysis, for Action Economics