The U.S. added 223,000 jobs in June, another solid piece of domestic economic data that will lend weight to the argument that interest rates should move higher sooner rather than later.
The headline unemployment rate fell more than expected, to 5.3%, according to figures released Thursday by the U.S. Labor Department. Analysts had predicted a gain of 230,000 jobs and that the unemployment rate would hold steady at 5.5%.
While the headline unemployment rate and the number of jobs created remain important economic indicators, much of the recent focus by investors, analysts and economists has been on wage growth.
The Fed will be scrutinizing these all of these numbers (with particular emphasis on wage growth) trying to determining whether the U.S. economy has gained enough upward momentum to absorb the increase in borrowing costs that will accompany a rate hike.
Borrowing costs will move higher for both consumers looking to buy big ticket items such as cars and homes, as well as businesses looking to borrow money for expansion and capital improvements.
Economic data, including labor market figures, had been mostly hit and miss throughout much of the first half of the year. Most labor reports have been healthy if not exactly robust, while housing and manufacturing data have been inconsistent.
Taken together all of that mixed data resulted in a U.S. economy that contracted during the first quarter. Last week the government’s gross domestic product (GDP) estimate for the first quarter was revised upward from an earlier estimate to show that the economy contracted by 0.2% from January through March rather than the 0.7% contraction originally reported. Better, but nothing to brag about.
A larger trade deficit and a smaller accumulation of inventories by businesses was blamed for the weak first quarter. In addition, consumers also spent less than previously believed despite lower gas prices that put more money in consumers’ pockets.
The disappointing 1Q GDP report contributed to the Fed’s decision not to raise rates at their June meeting, and many analysts believe international turmoil – debt crises in Greece and Puerto Rico and a selloff in Chinese stock markets – could prompt a delay past September and toward the end of the year. Much of that decision will depend on the performance of the economy during the second quarter.
All eyes have recently focused on wage growth. Economists have long predicted that as the U.S. recovered from the deep recession following the 2008 financial crisis that job creation would perk up and it has. Yet even as job growth accelerated and the unemployment rate fell wages remained stagnant.
The Fed says 3% annual wage growth is needed to lift inflation to the central bank’s 2% target rate. While those figures haven’t been reached yet, the momentum seems headed in that direction.
The Fed has been reluctant to raise rates for fear that prematurely raising borrowing costs could push the economy back into recession. The Fed has said it won’t raise rates until unemployment hits a range of 5.2%-.5.6% and inflation reaches 2%.