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The $1 Million question: Where is the US Jobs Market Headed?

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The $1 Million question: Where is the US Jobs Market Headed?

Introduction

This article was posted on Monday, 16:58, UTC.

The jobs report is widely followed by the analysts as it affects all the important markets – equity, bond, gold, and forex. But, what is it that makes the jobs report so important and what is the current trend in the jobs report telling us?

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Key Observations

  • June’s jobs numbers show that the economic recovery is on track
  • Wage growth remains sticky and may hurt inflation numbers if it doesn’t recover
  • For now, the US Federal Reserve unlikely to change its forecast for 2017

Let’s first understand why is the report so important.

What is the Importance of the Jobs Report

The United States is a consumer driven market, with personal spending accounting for 70% of the GDP. The jobs report provides a good insight into the state of the economy, as it gives an idea about the change in the spending power of the American public.

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When the economy is booming, the employers add more employees to cater to the increased demand. Additionally, if unemployment is low, the employers shell out higher wages to attract talent. All these, in turn, puts more money into the employee’s pockets, which is reflected in greater spending that boosts the GDP.

On the other hand, if the economy is struggling, demand decreases and the employers cut jobs to reduce their costs. This reduces the spending power of the consumers. The people who can spend also tend to save to cater for uncertain times. This again lowers demand and it becomes a vicious circle that can lead to a recession.

Nevertheless, it is not enough to have a high employment rate. A growth in temporary jobs, decrease in the number of working hours per week, and low wage growth are signs that the employers are still not convinced of the economy. Such an economy usually shows anemic growth.

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What has been the Trend in the Jobs Report since 2009

“The Great Recession” wiped off about 8.8 million jobs by February 2010, from its prerecession peak in January 2008. However, as 2010 progressed, the labor market stabilized and employers began adding jobs encouraged by low interest rates and a confidence that the Fed would do whatever it takes to support the economy.

The average job growth per month rose steadily from 2010, until it peaked at an average monthly addition of 250,000 jobs in 2014. That year, 3 million jobs were added. Since then, the average additions have been decreasing gradually, but have remained above the 2 million mark every year.

In 2016, the average jobs growth was 187,000, which has reduced marginally in the first half of 2017 to 180,000.

However, as the job market matures, the net jobs being added every month will slowdown. After all, the number of jobless people have reduced drastically in the past seven years.

Nevertheless, in June, the economy did not show any signs of a slowdown, as it added 222,000 new jobs, easily beating analysts’ expectations of 179,000 job additions. With the latest report, the US has seen 81 consecutive months of jobs growth.

“We’re been creating close to 200,000 jobs a month now for more than seven years. That’s just an incredible achievement. And that machine is still humming,” said Mark Zandi, chief economist at Moody’s Analytics, after the June jobs report, reports The Washington Post.

However, another critical factor along with jobs, wage growth, remains disappointing

Wage Growth is Weak

The Economic Policy Institute says that “slow wage growth is a key sign of how far the US economy remains from a full recovery”.

In June, the average hourly earnings increased by only 0.2% – an annual gain to 2.5%. Though the labor market has tightened, wage growth has remained sluggish.

Michael Stull, senior vice president at job placement firm Manpower North America, believes that the wage growth is anaemic because the skilled workers are unwilling to take a lower-paying job, while the employers believe that the available workforce is not technically qualified enough for the available positions with a higher pay.

Achieving a 2% inflation can become difficult if the wage growth continues to remain sluggish. So, should the Fed hold their forecast for one more rate hike this year or should they go ahead with it? The analysts are divided.

“Cycles don’t last forever, and we’re late in this economic cycle, and we have the Fed starting to raise rates. It’s a typical combination that causes lower growth and the danger of recession,” said Ed Keon, managing director and portfolio manager at QMA, reports CNBC.

However, most other analysts believe that with a tightening jobs market, the wage growth is likely to catch up in the future and they expect the Fed to go ahead with one more rate hike by the end of this year.

How did the Jobs Number Affect the Equity, Bond, Forex and Gold Markets?

The US stock markets are quoting at a rich valuation; hence, they need evidence that the economy will deliver a strong growth. June’s job report underlined the belief that the economy is picking up steam. As a result, the S&P 500 rallied 0.64%.

A strong economy will aid the Fed’s resolve to reduce its balance sheet and hike rates towards normalcy. Both the above are negative for save haven like gold. Therefore, gold extended its fall on Friday by 1.05%.

The bond traders, however, closely watch the wage growth because it gives a better insight into the inflation expectations. A muted increase in wages is unlikely to push inflation towards the Feds target zone of 2%. Therefore, the bond markets saw a sluggish response. The US 10-year Treasury note rose 2.3 basis points to end at 2.393% – the highest close since May 11. However, the bond yields remain below the highs of above 2.6% achieved in March of this year.

The US dollar index (DXY), which tracks the performance of the Greenback against six major currencies rose a modest 0.2%.

Featured image from Shutterstock

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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.

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