The biggest news in last Friday’s U.S. employment report wasn’t the stronger-than-expected 195,000 person increase in non-farm payrolls; it was the healthy upward revision of the data for April and May. Job growth in April, first reported as +165,000 jobs, is now estimated at +199,000 and May’s increase was revised from +175,000 to +195,000. The average increase in employment over the first six months of 2013 was 202,000 jobs per month, making this the best first half of the year since 2005.
- Employment in the key office-using sectors – financial, professional and business services, and information – increased by 65,000 jobs in June. Over the first half of the year, employment in office-using industries has increased an average of 77,000 jobs per month, the strongest six-month period since late 2005. Office-using employment is now within 235,000 of its pre-recession peak. Among the three office-using sectors, the strongest growth, by far, has been in professional and business services, where employment today is well above pre-recession levels.
- The unemployment rate remained unchanged at 7.6% as the number of unemployed persons rose for the second consecutive month. Significantly, the U-6 unemployment rate, which includes discouraged workers and those working part time because they cannot find full time work increased from 13.8% to 14.3%, suggesting that discouraged workers may be coming back into the labor force. Another positive indicator is the share of the unemployed who left their job – an indicator of confidence in the labor market. In June 8.8% of the unemployed left their jobs, the largest share since December 2008.
The U.S. economy continues to generate jobs at a healthy, if unspectacular pace. The good news is the private sector continues to grow in the face of significant headwinds from the ongoing fiscal drag (higher taxes and Federal spending sequestration). This suggests that as the impact of the fiscal drag diminishes later this year the economy will be poised to grow even more strongly. The bad news is that the fiscal cliff part II is still in front of us. The Federal Government is currently expected to reach the debt ceiling some time in the fall and the possibility of another debate over how to address the long term debt challenges faced by the U.S. will increase uncertainty and hold back growth.
The improvement in economic conditions that this report and other recent indicators point to has led to anxiety in financial markets, particularly the bond market, that the Federal Reserve will start to reduce its purchases of long term bonds. This concern has driven long term bond rates up sharply over the last two months, with the U.S. 10-year note yield rising from 1.66% in early May to 2.52% currently. The healthy employment growth over the past six months is an important factor encouraging the Fed that the economy is improving steadily and will not require the continuing stimulus of massive bond market purchases.
As the economy improves, interest rates will rise. The good news is, the reason for the increase is a healthier economy and that is good for everyone.