Hiring rebounded in June, with employers adding 224K new jobs. The pace of improvement in the labor market, however, has cooled. With wage growth still not threatening inflation, the Fed will still likely cut rates in July.

Unemployment and Wage Growth Stuck in Recent Range

After giving markets and Fed officials alike a scare in May, hiring got back on track in June. Employers added 224K new jobs, which pushed the three-month average up to 171K from 147K. The rebound confirms that the jobs market is hardly crumbling, but there were a number of signs that the pace of labor market tightening has cooled.

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Through the first half of the year, employers added an average of 172K jobs per month, down from 211K the prior six months. Trade-related headwinds appear to have seeped into hiring here at home. Although the manufacturing and transportation & warehousing sectors posted solid gains in June (up 17K and 24K respectively), hiring has slowed on trend. Roughly half the downshift in job growth in H1:19 from H2:18 can be traced to these two sectors, even though together they account for only about 12% of employment.

More domestic-oriented sectors are holding up better, however. Education & health services payrolls rose 61K in June and have strengthened over the first half of the year. Construction, professional & business and local government hiring were also standouts in June.

The unemployment rate edged back up to 3.7%. The uptick was driven by an increase in labor force participation, but leaves the jobless rate within the 3.6-4.0% range that has prevailed for more than a year now. Wage growth also came in a touch weaker than expected in June, 0.2%, and kept the year-ago change at 3.1%. At that pace, there is still little threat to inflation because productivity growth has kept unit labor costs comfortably below 2%.

Second Half Outlook: Moderation in Store

As we head into the second half of 2019, we expect the trend in hiring to settle back below 200K. Underlying that forecast is the assumption that a resolution of the trade dispute between the United States and China remains a ways off. While we do not expect further escalation, the ongoing nature of negotiations prolongs the uncertainty surrounding future trading relations. That uncertainty is likely to weigh most heavily on investment spending, but hiring is unlikely to be completely unscathed. Surveys on hiring plans and job openings have softened in recent months, suggesting businesses are already planning more moderate additions. While the trend in jobless claims has not really picked up, it is also no longer falling.

We look for businesses to add around 155K jobs per month in the second half of the year. That pace should be sufficient to keep the unemployment rate around 3.6% and wages rising a little over 3%. However, with labor market slack no longer clearly diminishing and inflation continuing to fall short of 2%, we expect the FOMC to guard against the slowdown and cut the fed funds rate 25 bps when it meets at the end of this month.

 

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