Yellen View on Slack Job Market Supported by Labor Report

Federal Reserve Chair Janet Yellen’s view that there’s plenty of room for gains in the labor market was confirmed by yesterday’s jobs report, economists said, bolstering the case for maintaining monetary stimulus.

While the Labor Department report showed employers added more than 200,000 jobs for the sixth straight month in July, there were also indications of fragility. A broad measure of unemployment that includes people working part-time because they can’t find full-time jobs rose, while wages stagnated.

The data support the Fed’s statement this week that a range of indicators suggests there’s “significant underutilization of labor resources,” according to Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York.

“This is what the Fed was hoping for,” Mulraine said. “There is sufficient slack in the labor market that there would be no urgency for them” to raise the benchmark interest rate for the first time since 2006.

A measure of underemployment rose to 12.2 percent last month from 12.1 percent in June. Average hourly earnings were unchanged in July after advancing 1.1 percent in the first half of the year.

The jobs report puts Fed officials “exactly where they wanted to be” after their July 30 policy announcement, said Aneta Markowska, chief U.S. economist at Societe Generale in New York. The Fed’s guidance on the future path for interest rates now “rests on the lack of wage growth,” she said.

The headline unemployment rate unexpectedly rose to 6.2 percent from 6.1 percent as more people sought jobs. The share of Americans employed or looking for work, known as the participation rate, increased to 62.9 percent in July from 62.8 percent in June, which matched the lowest level since 1978.

Six Months

The 209,000 advance in non-farm payrolls last month followed a 298,000 June increase that was stronger than initially reported. The last time payrolls grew by 200,000 or more for at least six months in a row was in 1997.

Still, the increase in payrolls lagged the median forecast for a 230,000 increase in a Bloomberg survey of economists. Treasuries advanced as investors pared bets the Fed will accelerate a reduction of monetary stimulus forecast to begin next year.

The yield on the five-year note fell nine basis points, or 0.09 percentage point, to 1.67 percent in New York. The Standard & Poor’s 500 index slipped 0.3 percent to a two-month low of 1,925.15.

The report “does nothing to support the notion that the Fed is going to pull forward the rate of liftoff,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York. While job gains “were solid,” they “just didn’t meet unrealistic expectations,” he said.

More Room

As more people start seeking jobs, the unemployment rate could rise, giving the Fed more room to maintain near-zero interest rates as it winds down asset purchases, a process officials have said the central bank will probably complete in October.

Stagnant wages provide further support for the Fed’s easy-money policies, said Pacific Investment Management Co.’s Bill Gross.

“American wages on Main Street are Janet Yellen’s number one concern,” Gross, manager of the world’s biggest bond fund, said during a radio interview on “Bloomberg Surveillance” with Tom Keene.

Not everyone was as bearish.

“This economy is strong and the Fed will be normalizing interest rates sooner rather than later,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Factories, Construction

Construction companies and factories were among those that added more to payrolls in July than a month earlier. Employment gains cooled at retailers, business services and education and health services.

Other reports on consumer spending and manufacturing showed the economy gaining speed.

Manufacturing expanded last month at the fastest pace in more than three years, led by a surge in orders. The Institute for Supply Management’s factory index increased to 57.1, the highest since April 2011, from 55.3 a month earlier, the Tempe, Arizona-based group reported yesterday. Readings above 50 indicate growth.

Consumer spending rose in June by the most in three months, according to data from the Commerce Department, ending the quarter on a strong note and signaling that job growth will bolster the world’s largest economy.

Strong demand for cars is one reason New York-based aluminum maker Alcoa Inc. is hiring. A $300 million expansion at Alcoa’s Davenport, Iowa, facility led to 150 new full-time jobs, said Rob Woodall, manufacturing director at the plant.

“This is following the growth in automotive, but this is also because of an expansion of the use of aluminum in automotive,” Woodall said during an interview at the facility, which boasts the world’s largest aluminum rolling mill.

Before it's here, it's on the Bloomberg Terminal.