Note that I use the phrase “headline jobs.” This is because delving further into the report shows that things are not as strong as they appear. To start, the February number of 295,000 jobs added was a good bit above expectations, and brought the unemployment rate down to 5.5%, which puts the rate at the upper boundary of what the Fed is believed to consider acceptable. Furthermore, this jobs report is the most recent in what has become the best stretch of job creation in 15 years. Over the past six months, the US has added just under 300,000 jobs per month, the best since the six months ended in March 2000. Quite impressive.
As impressive as those numbers are, they are not enough to make us comfortable with a June rate hike. First and foremost, upward wage pressure is non-existent. Average hourly earnings increased by a scant 0.1% in the month, a number below forecasts. Over the last year, earnings are up a paltry 1.98%, and that yearly number has actually been decreasing over the past few months. Simply put, an absence of meaningful gains in worker pay is lingering problem. With high rates of job growth and an unemployment rate near normal, we should be seeing workers gaining the leverage needed to demand higher pay. We are not.
The second reason we believe a June rate hike is premature is that while the unemployment rate has dropped, a main driver of the decrease is that the labor force is shrinking because fewer people are looking for a job. According to the Bureau of Labor Statistics, the Labor Force Participation Rate is at 62.8%, and has hovered between 62.7% and 62.9% for the past 11 months. This is a 37 year low. Add to this the steep drop in oil prices and the strong dollar, and there is little reason to believe that inflation will be a meaningful problem by June.
Next week is light on potential market-moving news until Thursday when we get the weekly Jobless Claims report and the Retail Sales report, and Friday when the Producer Price Index comes out.