The US job market continued to impress investors and policy makers in July after posting phenomenal growth in June. The two months have established the fundamental strength of the US economy, and the chances of a rate hike this year have increased.
Non-farm payroll in the US increased 255,000 last month on a seasonally adjusted basis. The US economy had been giving mixed signals to the Fed since the beginning of the year, but its receptiveness to another rate hike is starting to emerge. Not increasing the rate this year may drive up inflation next year because the economy has started to heat up.
The private-sector’s average hourly earnings surged 8 cents (0.3%) in July to $25.69. This increase in the same month last year was recorded at 2.6%, outpacing inflation. Private sector wages produced an impressive growth rate in July, whereas the unemployment rate stayed at 4.9%.
Unemployment figures suggest US employers are ignoring the impact of international headwinds and focusing on growth plans. They have continued hiring and contributed to the GDP. The consumer-price index (CPI) rose 1.1% in June this year compared to 2015. Bloomberg analysts expect CPI to increase 1.3%, 2.2% and 2.2% in FY16, FY17 and FY18 respectively.
The main concern for the Federal Open Market Committee (FOMC) members is consumer spending, which has a direct impact on aggregate demand in the economy. Positive employment figures mean more consumers to support demand even if interest rates are increased.
The Fed will begin its next policy meeting on September 21st. According to Fed Fund futures, the probability of a hike following the September and November meeting currently stands at 26% and 27.6% respectively. The employment pool is shrinking, which means employers will compete to hire the best talent.
All major sectors of the economy, including professional and business services, health care, finance, food services, construction, manufacturing and government sectors added jobs last month. Professional and business services gained the most with 70,000 new jobs, health care was the second largest gainer with 43,000 new jobs, and finance jobs increased by 18,000. Leisure and hospitality remained a significant contributor, having added 45,000 jobs. The government sector was stable in July and managed to secure 38,000 new jobs in total.
The mining sector, which was deeply hurt by the slump in basic material prices continued to shrink this quarter as well. The number of employees in the sector has declined by 220,000 since September 2014. However, the number of jobs in July was steadily disseminated. Full-time jobs increased by 306,000, and part-time jobs gained 150,000 employees.
The revised figures from previous months showed US businesses added 292,000 jobs in June and 24,000 in May. Employment gains in 2016 (till July) have averaged 186,000 a month, having been recorded at 229,000 a month in 2015.
Two-year note yields, which are the most sensitive to Fed policy, increased for the first time in the last four days following July’s payroll data. There was a five basis point increase to 0.69%. The benchmark 10-year note yields rose four basis points, to 1.57%.