Economic Perspective on June 2018 Job Report

John Beuerlein
John Beuerlein
Chief Economist
Pohlad Companies

July 2018 – Labor Department reports 213,000 jobs added in June 

The Labor Department reported on July 6 that employers added 213,000 to their payrolls during June, following an upwardly revised 244,000 increase in May. While payrolls rose, the unemployment rate also ticked up to 4.0 percent from 3.8 percent as the labor force recorded an increase of 601,000 individuals, of which 102,000 found employment – consequently, unemployment numbers rose by approximately 500,000. The sizable increase of new workers is an indication that the labor market is not as tight as some had feared. It is also notable that the increase in workers came without a substantive increase in average hourly earnings. Average hourly earnings were not as strong as expected. The year-over-year rate of average hourly earnings growth remained at 2.7 percent. Of note, the most recent reading for the Consumer Price Index was 2.7 percent, indicating that average hourly wages are barely keeping up with this measure of inflation. Wages are improving, but the rate of growth remains tepid. Wage pressures are still sufficiently moderate to prevent Fed officials from worrying that they are at risk of falling behind the inflation curve. There has been no evidence that the trade-war threats of the past few months have impacted hiring. The manufacturing sector should be one of the first to exhibit weakness associated with trade sanctions, but hiring in this sector is the strongest since 1998. Other monthly economic reports have continued to come in generally stronger than expected. In fact, expectations for 2Q GDP are now between 4 percent and 5 percent. The first estimate of 2Q GDP will be published July 27. Most economists are anticipating economic growth in 2018 to be the fastest in the current economic cycle due to the tax reforms passed in 2017. It is interesting to see that wage pressures have not developed, yet, even though economic growth appears to be accelerating. During the month of June, the Fed raised the upper target for the Federal Funds rate to 2 percent as expected. Markets are pricing in another rate hike in September, but the Fed Funds futures market is giving an additional rate hike in December less than a 50 percent probability at this time. The yield curve, as defined as the difference between 10-year Treasury yields and 2-year Treasury yields, continues to tighten. The spread between these two yields is now down to 30 basis points. When the yield on the 10-year is less than the yield on the 2-year, the yield curve is considered to be inverted. Historically, an inverted yield curve has preceded the onset of a recession by 12 – 18 months over the past 60 years. The Fed is very aware of this phenomenon. It will be interesting to see how aggressive the Fed will be for the remainder of the year in pushing short rates higher and causing the 10-year/2-year spread to tighten further. Not to be lost with all of the positive economic news is the fact that there are signs developing that a transition to slower growth may occur as we move into 2019 and lose the positive impact of the Tax Cut & Jobs Act passed last December. Rising yields, a flattening yield curve, slowing money supply growth, and increased market volatility all suggest that the credit market cycle is in its later stages and the economic cycle is maturing.