The stronger than expected gains in non-farm payroll at 255k in July and upward revisions for June and May have strengthened evidence of a strengthening US economy. The nonfarm payroll employment for May was revised from 11k to 24k, and for June from 287k to 292k. Clearly, the soft patch around May was an aberration.
Payroll data for July suggest a broad based strength with rising average weekly wage, trend rise in labor participation rate and a stable unemployment rate at 4.9%. Other data point indicate tightening in skilled labor market along with improvement for women and several ethnic groups. Major contributors to gains in employment are education & health services, professional & business services and hospitality. Undoubtedly the solidity of labor market will challenge the dithery Fed has demonstrated recently with Yellen shifting the goal post from slackness in labor market, to uncertainties relating to global financial markets, China, Brexit etc.
While the headline Q2 GDP growth at 1.2% appeared disappointing, it was significantly dragged down by inventory correction, which eclipsed the robust consumption. The strengthening labor market and private consumption even in the face of higher core inflation forebodes strong GDP growth of over 2.5% for Q3-Q4 2016. Hence, with Yellen acknowledging the diminishing risk to US growth already, strong job data would now swing the spotlight on the Fed, who for years has held on to zero-near zero fed rate citing slackness in the labor market. In addition, notwithstanding the risks from Brexit, global and US domestic financial conditions are fairly robust. Also with EMs including China stepping on to fiscal stimulus, risks from EM outlook also cannot be an excuse now. The prolonged dithery of the Fed has doped the fixed income and currency markets into somnolence, hoping that there will some or the other reason for Fed to dodge again. But with escape routes running out, the probability of some serious correction will rise if the Fed decides to raise rate in September. With no Fed meeting in August, Yellen’s Jackson Hole testimony, between 25th-2 7th August, will be of immense importance in the immediate future.