Solid US June Employment Report

The June employment report showed solid job growth, with nonfarm payrolls rising 195k and private payrolls rising 202k. The gain in nonfarm payrolls was much larger than consensus (165k) was expecting.

Net revisions to the previous two months were also substantial with private payrolls growing at almost 200k per month during the April-June time period. The unemployment rate held steady at 7.6% since the gain in household employment was relatively modest at 160k and the participation rate rose by one-tenth to 63.5%. Consensus views say the pace of payroll growth seen in recent months will be sufficient to keep the unemployment rate in its downward trajectory, as long-term demographic trends will continue to offset any cyclically-driven rebound in labor force participation. The recent rise in the participation rate to 63.5% from 63.3% in April reflects variability around the trend, which is seen as flat to somewhat lower in the coming quarters. Consensus forecast that the unemployment rate will fall to an average of 7.1% in 4^th quarter 2013.

Although the unemployment rate did not move lower, the market views this report as signaling that labor markets are improving at a pace that leaves the Fed on target for a tapering of its asset purchase program in September. Goods producing sectors were the soft spot in this report, with manufacturing payrolls falling 6k and construction adding 13k. Manufacturing payrolls have now fallen for four consecutive months, consistent with trends in the ISM manufacturing index. Private service sectors were, again, the main engine of job growth with the sector adding 205k, 207k, and 194k jobs in April, May, and June, respectively, with the June report showing broad-based strength. Retail trade (37k), financial (17k), business services (53k), education and health (13k), and leisure and hospitality (75k) all contributed to the strong tone of the report. Government payrolls, in line with expectations, fell 7k with most of that (-5k) coming from the federal government.

Average hourly earnings were up 0.4% in June, above consensus (0.2%) forecasts, and May was revised higher to 0.1% after initially showing no gain. However, average weekly hours held steady at 34.5 for the third consecutive month. The index of aggregate hours worked is now up 2.2% annualized in Q2, versus the 3.6% seen in Q1. The slowing in hours is consistent with a softening in production following the temporary rebound in production and inventories in the first quarter. Average hourly earnings are up 2.2% year over year and the payroll proxy (average hours worked times average hourly earnings) is up 4.4% in Q2 (quarter over quarter annualized) against a rise of 6.2% in first quarter. Both series are consistent with an end to the inventory rebuild that boosted production and GDP growth in the first quarter.

The June employment report was a solid report. There is still expectation that the Fed will begin to reduce the pace of its purchases at the September meeting although the Fed has tied the conclusion of purchases to the unemployment rate reaching about 7.0%. The unemployment rate has been steady during the March-June time period with payroll growth keeping the unemployment rate on a downward path.  There are trends in the labour market, income, and hours worked, as indicating the economy is slowing in second quarter, but the expectation of Federal Reserve policymakers is for a substantial acceleration in the pace of activity in the second half of 2013 to 3.25%. The baseline outlook is that the Fed will maintain its purchase rate of $85bn per month through August and then taper the pace of purchases to $70bn ($35bn Treasuries and $35bn in agency mortgage-backed securities) at its September meeting. Based on consensus forecast that the unemployment rate will reach 7.0% in 1^st quarter 2014, the market expects the Fed to conclude its bond purchases in March of next year.