No Worries: Buoyant June Jobs Report Indicates Gloomy May Was a Fluke

Labor Department says 287,000 new jobs were created in June.
By Tim Mullaney ,

So, May's jobs report was a fluke after all.

The U.S. economy added 287,000 jobs in June, crushing forecasts for 180,000 new positions and rebutting fears of a U.S. slowdown or even recession that were stoked by last month's much worse-than-expected hiring report. The unemployment rate was 4.9% in June, the Labor Department reported Friday morning.

The details of the report were mixed but mostly positive. Wages rose by 2 cents an hour, bringing their 12-month gain to 2.6%, slightly missing the average economist forecast for a 2.7% gain, according to a Bloomberg survey.

Manufacturers joined the rally, adding 14,000 jobs, with the biggest gains at food companies like Tyson  (TSN) - Get Report . Government employers, who have lagged throughout the recovery, added 22,000 positions. And construction companies still bouncing back from the post-2006 housing bust added no jobs, as gains at remodeling companies were offset by losses in new-construction employment at firms like KBHome (KBH) - Get Report and D.R. Horton (DHI) - Get Report .

Gains continued in strong-performing fields like health care, which added 38,500 jobs. Retailers added nearly 30,000, financial companies like Bank of America (BAC) - Get Report boosted employment by 16,000 and telecommunications firms added 28,000, boosted by the return of 35,000 workers who were on strike against Verizon Communications (VZ) - Get Report in May.

"The job market is performing well. Last month was a fluke," said Mark Zandi, chief economist at Moodys Analytics. "Consistent with this is the steady pick-up in wage growth."

Bond markets moved lower, with the yield on 10-year Treasury bonds rising three basis points to 1.42%. The odds that the Federal Reserve will raise interest rates in December, which have fluctuated in recent days, stood at 79% before the report, according to CME FedWatch, which uses futures prices to calculate probabilities.

The Labor Department also revised its estimate of the number of jobs added in May, to 11,000 from a previous estimate of 38,000. Both old and new estimates mark May as the worst performance since the economy began its six-year streak of monthly job gains in October 2010.

Economists generally think the U.S. is on pace to add 150,000 to 175,000 jobs per month for most of this year, down from the 200,000-plus it was adding as recently as the second half of 2015. The single biggest reason for the slowdown is the economy's march ever closer to full employment, or the maximum level at which people can be employed without sparking inflation. That number fluctuates with economic conditions, but is generally around 4% to 5% unemployment.

If it adds about 160,000 jobs a month, the economy will drive unemployment down to 4.4% by the fourth quarter and below 4% sometime in 2017, Point72 Asset Management chief economist Dean Maki said earlier this week.

That's about the pace the economy has been keeping, according to surveys of private companies by payroll processor ADP (ADP) - Get Report . Private companies added 172,000 jobs in June and 168,000 in May, according to a report by ADP and Moodys Analytics on Thursday.

"When the month-to-month numbers are so erratic, the only choice you really have is to identify an underlying trend," Economic Outlook Group chief economist Bernard Baumohl said in an e-mail. "And what we see is a genuine slowdown in hiring under way based on quarterly averages, which I attribute to the profound uncertainty business leaders have on the overall outlook. There are just too many important economic, political, and geopolitical variables in play right now. So, it's fine to show a sigh of relief about last month's strong numbers--- but it's way too early to uncork any Champagne bottles."

The question will be whether the U.S. economy's relative strength may prompt the Federal Reserve to raise rates in December, and whether that might boost the dollar and hurt U.S. exports to nations that are using super-low or even negative interest rates to spur their own economies. Big exporters like Boeing (BA) - Get Report are hurt when a rising dollar makes their products more expensive for offshore customers.

Baumohl also questions whether the presidential campaign will rattle business leaders further, suppressing employment and investment alike. "There are still too many potential hazards before us, not the least of which is a wacky presidential campaign with two principal candidates that have radically different ideas on how to help the economy,'' he said.

But for the moment, the news is solid. Next month's jobs report will be the first to reflect any impact from the United Kingdom's vote to leave the European Union, and the debate over the economy will flare anew.

"As Agent Mulder would say, I want to believe the June number, not the May number," Richard Moody, chief economist at Regions Financial, said, referring to the sci-fi show The X-Files. "The reality, however, is that I don't believe either. The "truth" in the labor market lies somewhere between the May and June numbers."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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