June nonfarm payrolls rose 223k following -60k in downward revisions to the prior two months. Additionally, the unemployment rate fell to 5.3% from 5.5% previously, which is the lowest reading since April 2008 (5.0%). However, the drop in the unemployment rate was due to a plunge in the labor force participation rate, which fell to 62.6% from 62.9% previously. This is the lowest reading since October 1977. The U-6 rate, a broader measure of labor underutilization, declined to 10.5% versus 10.8% in May. Despite the decline in unemployment, wage pressures remain well contained. Average hourly earnings were flat in June and have risen just 2% over the past 12 months, far below the 3%-plus rate that is necessary in the Fed’s view to push core inflation back toward 2%. While the labor market remains healthy, these data make it less likely the Fed will initiate a hike at the September FOMC meeting. However, remember that there are still two more employment reports between now and the September 16-17 meeting. Hence, monetary policymakers will likely want to keep the option of hiking in 2015 and will continue to guide market participants toward keeping a healthy risk premium in 2015. The index of aggregate hours was up 0.2% in June and increased at a 1.0% annualized rate in the quarter. Assuming there was a 1.5% bounce-back in productivity after back-to-back declines in the previous two quarters, the hours data are consistent with our projection the economy grew 2.5% last quarter.
(Deutsche Bank)
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