Good News on the Jobs Front

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by Ralph Cole, CFA
Director, Equity Strategy and Portfolio Management

Good News on the Jobs Front

Expectations and events often explain market movement. With earnings season underway next week, every earnings report will be judged on whether those expectations were exceeded, met or missed. Perhaps the most important aspect is if future growth outlook meets expectations.

The same explanation can be used for economic statistics. Today’s nonfarm payroll report beat expectations and was unequivocally good news for the economy and the stock market. U.S. employment grew by 213,000 in June versus the expected 195,000, with prior months jobs revised higher by 37,000. It’s exciting to see broad-based job growth across industries this late in the economic cycle without alarming rates of wage growth to accompany it. Average hourly earnings grew by 2.7 percent year-over-year, which is consistent with non-inflationary wage growth.

With positive momentum on the jobs front, why then has unemployment increased to 4.0 percent from 3.8 percent? That is because 600,000 people joined the labor force last month! Higher wages and a continued strong labor market enticed people back into the work force that had either stopped looking for a job or were not actively seeking a job. The most recent period of increased participation rate reverses a trend that started in the late 90’s. There was small reversal in the last economic cycle, but you can see on the chart below the dramatic increase over the past couple of years, albeit from lower levels. This development increases the potential growth for the U.S. economy in coming years.

Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics

Taxes More Important than Tariffs

While trade headlines caused the markets to gyrate in recent months, up to this point they have had no measurable impact on economic activity. The Institute for Supply Management Manufacturing Index rebounded to 60.2 in June; this is only the third time in the last 13 years the reading was over 60. As of today, our belief is that the Tax Cuts and Jobs Act will have a far larger impact on economic activity than any tariffs announced. With earnings season around the corner we will look to company earnings reports to determine the impact from tariffs imposed on $34 billion in Chinese goods that were enacted this morning.

Week in Review and Our Takeaways

  • Economic data remained strong as we ended the second quarter, leading stocks higher by 1.5 percent on the week

  • Job growth remains in Goldilocks territory with solid gains and reasonable wage growth

  • U.S. economic potential growth increases with increased labor participation

  • Earnings season will provide insight to potential tariff fallout