The pay is too damn low: July Jobs Report Shows Growth, but Wages Stubbornly Stagnant

The July employment report was almost about as good as it gets. The U.S. economy generated 209,000 new jobs, well in excess of the anticipated 180,000. As expected, the unemployment rate fell to 4.3 percent, matching the May low for this cycle. Average hourly earnings have yet to accelerate, but the pace did increase modestly in the month, and the participation rate edged higher. If the Fed does, indeed, intend to shrink its balance sheet starting in September, there was likely nothing in this report that would dissuade it from doing so. And following the report, expectations for a December rate hike increased to 40 percent from the 37 percent the day prior.

The one missing ingredient at this level of unemployment remains the stubborn refusal of wages to increase in a meaningful way. The last time the unemployment rate was close to this low, in 2007, wages were growing between 3.0-3.5 percent on a twelve-month basis. It should be noted, however, that back then core inflation was running between 2.0-2.3 percent as measured by the Personal Consumption Expenditure (PCE) deflator, not the 1.5 percent pace of this past June.

We will see how consumer prices started out the third quarter on Friday with the July Consumer Price Index report. The twelve-month headline rate is expected to edge higher to 1.8 from 1.6 percent in June, while the core rate is expected to be unchanged at 1.7 percent.

As labor continues struggling to participate fully in this recovery, shareholders are the beneficiary. Profit margins remain high, and corporate earnings are exceeding expectations. Second quarter earnings season is now roughly 90 percent complete, and according to Factset, S&P 500 companies in the aggregate are reporting an increase in margins compared to last year.[i] And earnings are likely to grow by 10.1 percent when full second quarter results are in, well ahead of the expected 6.4 percent pace at quarter end. Only the consumer discretionary sector is expected to see a decline.

The third quarter looks less promising. Estimates have been lowered since the end of the second quarter, as expectations for the energy sector in particular have been reduced along with the price of oil. Earnings in the third quarter are now expected to grow by 5.6 percent, down from 7.1 percent on June 30. But it should be noted that third quarter estimates are now lower for all but technology and telecom, which is still expected to suffer a decline, just of somewhat lesser magnitude. Nevertheless, current estimates of 9.5 percent for the full year have remained relatively steady.

Despite the robust July jobs report, bond yields fell for the week. The ten-year note closed at 2.26 percent, down from 2.29 the prior week, although it did bounce off its lows following the jobs report on Friday. The two-year note rose just one basis point on the week to 1.36 percent. The dollar rebounded sharply after the jobs report as well, arresting for the time being its year-long decline. Stocks edged higher, with the S&P 500 adding just 0.2 percent to close just one point shy of the record set the week before. The Dow Jones Industrial Average did manage to set another new record high at week’s end, its eighth consecutive record close.

Congress is in recess until after Labor Day, and with earnings season winding down, equity investors will be grasping about for something to fill the void as we get into the historically-weak months of August and September.

 

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