US jobs re­port bol­sters case for Fed tight­en­ing

Kuwait Times - - BUSINESS -

US em­ploy­ers hired more work­ers than ex­pected in July and raised their wages, signs of labor mar­ket tight­ness that likely clears the way for the Fed­eral Re­serve to an­nounce a plan to start shrink­ing its mas­sive bond port­fo­lio. The Labor Depart­ment said on Fri­day that non­farm pay­rolls in­creased by 209,000 jobs last month amid broad-based gains. June’s em­ploy­ment gain was re­vised up to 231,000 from the pre­vi­ously re­ported 222,000. Av­er­age hourly earn­ings in­creased nine cents, or 0.3 per­cent, in July af­ter ris­ing 0.2 per­cent in June. That was the big­gest rise in five months. On a year-on-year ba­sis, wages in­creased 2.5 per­cent for the fourth straight month.

“The Fed set a low bar for bal­ance sheet nor­mal­iza­tion to be­gin in Septem­ber, and to­day’s num­ber cleared that bar with elan,” said Michael Feroli, econ­o­mist at JPMor­gan in New York. Although the econ­omy is near full em­ploy­ment, wage growth has not been strong in part be­cause many of the jobs be­ing cre­ated are in low-wage in­dus­tries. Last month, res­tau­rants and bars added 53,100 jobs. July’s monthly in­crease in earn­ings could, how­ever, of­fer Fed pol­i­cy­mak­ers some as­sur­ance that in­fla­tion will grad­u­ally rise to the US cen­tral bank’s 2 per­cent tar­get.

Econ­o­mists ex­pect the Fed will an­nounce a plan to start re­duc­ing its $4.2 tril­lion port­fo­lio of Trea­sury bonds and mort­gage-backed se­cu­ri­ties at its next pol­icy meet­ing in Septem­ber. The Fed bought th­ese se­cu­ri­ties to lower in­ter­est rates in the wake of the 2007-2009 fi­nan­cial cri­sis.

Slug­gish wage growth and the ac­com­pa­ny­ing be­nign in­fla­tion, how­ever, sug­gest the Fed will de­lay rais­ing in­ter­est rates again un­til De­cem­ber. It has in­creased bor­row­ing costs twice this year and its bench­mark overnight in­ter­est rate is in a range of 1 per­cent to 1.25 per­cent.

The dol­lar rose and was set for its big­gest one-day gain ver­sus a bas­ket of cur­ren­cies this year, while prices for US Trea­suries fell. Stocks on Wall Street edged higher. Econ­o­mists had fore­cast pay­rolls in­creas­ing by 183,000 jobs and wages ris­ing 0.3 per­cent in July. Repub­li­can Pres­i­dent Don­ald Trump, who in­her­ited a strong job mar­ket from the Obama ad­min­is­tra­tion, cheered Fri­day’s em­ploy­ment data. “Ex­cel­lent Jobs Num­bers just re­leased - and I have only just be­gun,” Trump said on Twit­ter. “Many job sti­fling reg­u­la­tions con­tinue to fall. Move­ment back to USA!”

Trump has pledged to sharply boost eco­nomic growth and fur­ther strengthen the labor mar­ket by slash­ing taxes, cut­ting reg­u­la­tion and boost­ing in­fra­struc­ture spend­ing. But af­ter six months in of­fice the Trump ad­min­is­tra­tion has failed to pass any eco­nomic leg­is­la­tion and has yet to ar­tic­u­late a plan for much of its eco­nomic agenda.

Un­em­ploy­ment rate falls

Wage growth is cru­cial to sus­tain­ing the US eco­nomic ex­pan­sion af­ter out­put in­creased at a 2.6 per­cent an­nual rate in the sec­ond quar­ter, an ac­cel­er­a­tion from the Jan­uary-March pe­riod’s pedes­trian 1.2 per­cent pace. The econ­omy also got a boost from an­other re­port on Fri­day show­ing a sharp drop in the trade deficit in June.

The un­em­ploy­ment rate dropped one-tenth of a per­cent­age point to 4.3 per­cent in July, match­ing a 16-year low touched in May. It has de­clined five-tenths of a per­cent­age point this year and is now at the most re­cent Fed me­dian fore­cast for 2017.

“Sta­ble year-on-year wage growth should de­crease the per­ceived risk of fur­ther slow­ing in wages and prices,” said An­drew Hol­len­horst, an econ­o­mist at Cit­i­group in New York. “Strong pay­roll gains that place down­ward pres­sure on the post-cri­sis low un­em­ploy­ment rate will keep the cen­ter of the Fed com­fort­able with in­creas­ing pol­icy rates in De­cem­ber.” July’s de­cline in the job­less rate came even as more peo­ple en­tered the labor force, un­der­scor­ing job mar­ket strength.

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