Finally, it's all coming together for the US labor market
FRED
On Friday, we learned that the economy added 280,000 jobs in May, more than Wall Street economists had forecast. What's more, this report showed that the amount of jobs added in April and March were also revised higher by 32,000, bringing the average job gains over the last 3 months to 207,000.
But the biggest part of the report on Friday, however, was that at long last we are seeing wage growth.
Worker wages grew by 0.3% in May compared to the prior month and rose 2.3% over the prior year. The year-on-year increase was the most since October 2009 and shows the final piece of the labor market puzzle is being filled in.
In a note to clients following the report, Deutsche Bank economist Torsten Sløk wrote, "This is what we have been waiting for since 2009. In other words, the virtuous cycle has begun."
Why wages matter
Right now, markets are concerned about one thing: The Federal Reserve.
Deutsche Bank
Markets expect that before the end of 2015, the Fed will raise interest rates for the first time since July 2006. The latest Fed Speak from New York Fed president Bill Dudley affirmed this view, and while markets don't expect the Fed to do anything at its next policy meeting on June 16-17, the July and September, most market participants see the Fed raising rates before the end of this year.
The Federal Reserve, for its part, is trying to fulfill its dual mandate of price stability and full employment. Currently, the Fed is targeting 2% inflation and projects the labor market will be at "full employment" when the unemployment rate is at 5.1%.
But these are just projections.
What the Fed really needs to see is wage growth, as more money in the pockets of American workers and consumers has been the missing ingredient since the financial crisis.
And so while the Fed expects that with the unemployment at 5.1% the economy will be facing inflationary pressures, perhaps the unemployment rate at which inflation begins to take is somewhat higher. Friday certainly suggests this might be the case.
Encouraging participation
Part of why the unemployment rate rose on Friday despite the stronger-than-expected job gains is that more people joined the labor force, with the labor force participation rate rising to 62.9%.
And so this increase is actually an encouraging sign for the labor market. People who are out of work and looking for a job are considered part of the labor force, and much of the decline in the labor force participation rate over the last several years was attributed to workers dropping entirely out of the workforce. But with an increase in labor force participation, not only are people actually working, but people are now trying to find work.
Deutsche Bank
And so while outright job gains and wage increases are the kinds of top-line things economists and policy makers want to see in the labor market, these lesser-watched indicators showing that Americans are simply less downbeat about their job prospects are the signs of a robust labor market.
On Friday, bonds sold off as markets took Friday's labor market as a sign of potential Fed tightening to come. For the last several years, betting on Fed inaction with respect to interest rates has been a winning trade.
But as wages increase and job gains remain solid, this time, at least for Fed policy, might actually be different.
- A couple accidentally shipped their cat in an Amazon return package. It arrived safely 6 days later, hundreds of miles away.
- A centenarian who starts her day with gentle exercise and loves walks shares 5 longevity tips, including staying single
- 2 states where home prices are falling because there are too many houses and not enough buyers
- "To sit and talk in the box...!" Kohli's message to critics as RCB wrecks GT in IPL Match 45
- 7 Nutritious and flavourful tiffin ideas to pack for school
- India's e-commerce market set to skyrocket as the country's digital economy surges to USD 1 Trillion by 2030
- Top 5 places to visit near Rishikesh
- Indian economy remains in bright spot: Ministry of Finance