Highlights:
- Payroll employment rose 209k in July. That was above an expected increase of 180k and built further onto June’s solid 231k gain.
- The increase in July payrolls was less reliant on government employment which rose only 4k after the 37k surge in June which resulted in private employment strengthening to 205k from June’s rise of 194k.
- The household survey indicated an even greater employment gain of 345k which contributed to the unemployment rate dropping to 4.3% from 4.4% in June.
- The annual increase in average hourly earnings remained unchanged at June’s rate of 2.5%.
The robust 209k increase in July payrolls is indicative of firms experiencing sufficiently strong demand to remain confident about taking on new workers. This in turn is helping to send the unemployment rate lower to 4.3% in July. Tightening labour markets had been putting upward pressure on wage inflation through 2015 and 2016. However, data so far this year, including today’s data for July, show wage gains flattening out at around 2 1/2% which matches the 2016 increase and compares to increases of 2.3% and 2.1% in 2015 and 2014, respectively. Confirmation that labour markets are approaching full employment is expected to warrant the Fed continuing to withdraw current stimulative monetary conditions. Though tightening labour markets will eventually return wage inflation to an upward trend, in the interim, the absence of wage pressure will keep the pace of tightening gradual. Our forecast assumes one further 25 basis point hike in fed funds this year with similar hikes in each of the four quarters of 2018. This modest rise in official rates is expected to be paired with the Fed starting to gradually shrink its balance sheet starting in October.
