News Flash—Inside June’s Unemployment Report

Data show recent employment gains aren’t “too slow.”

June’s Employment Situation Report beat expectations, with the US economy adding 195,000 (vs. consensus estimates of 165,000). The unemployment rate held steady at 7.6%, but only because 177,000 folks entered the labor force—a sign workers are noticing labor market strength.

Overall, the report confirms US labor markets are pretty darned healthy 40 months after employment’s February 2010 lows—one of the many underappreciated positive developments in the US economy. That doesn’t mean June’s report is hugely bullish for stocks—employment is a late-lagging indicator and doesn’t drive economies or equities—but it can perhaps help investor sentiment.

And sentiment about US labor markets still seems rather dour. For example, we still see headlines fretting this employment recovery’s slow pace. And it’s true, by some measures, this recovery’s been a touch slower than usual. Total nonfarm payrolls are still about 2.15 million below their January 2008 peak. But much of that headline weakness stems from public sector job cuts at the federal, state and local levels. During this employment recovery, the public sector’s shed about 619,000 jobs—while the private sector’s added about 7.2 million (Exhibit 1). Private payrolls are only 1.6 million behind January 2008—still not great, but not as bad as widely assumed.

Exhibit 1: Total, Private and Government Nonfarm Payrolls Since February 2010

Source: Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, as of 7/5/2013.

By historical standards, private sector job growth during this expansion isn’t terribly slow—it’s the third-fastest of the past four recoveries (Exhibit 2). Private sector job creation was slower during the early 1990s and 2000s.

Exhibit 2: Historical Private Payroll Gains

Source: Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, as of 7/5/2013.

Some say job growth is somehow too slow to foster meaningful economic growth—but as we’ve written here, here and here, employment doesn’t drive growth. It’s the other way around. That’s true at all points of the economic cycle, not just early in the recovery—there’s no mid-cycle tipping point where unemployment starts leading the economy. Some suggest we need stronger hiring in order to see continued consumer spending growth, but the data don’t support this—job growth lags spending growth just as it lags broader economic growth (Exhibit 3).

Exhibit 3: Year-Over-Year Change in Employment and Consumer Spending

Source: Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, Bureau of Economic Analysis, as of 7/5/2013.

Looking ahead, with economic growth still on the slow side, payrolls might not grow super-fast. But stocks don’t need super-fast jobs growth. Strong fundamentals globally—like high and rising corporate earnings—should propel equities higher over the period ahead.

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