Job additions, which had scared policymakers and market participants alike with the downward revision for April and dismal additions in May, seem firmly back on track. From June to August, a total of 697,000 jobs have been added with additions in July being the strongest this year. Though 151,000 jobs were added in August, much lower than both June and July, it’s not alarming.
In the September 2016 monetary policy statement, policymakers observed that “the labor market has continued to strengthen.” They added, “Although the unemployment rate is little changed in recent months, job gains have been solid, on average.”
The job market had been the foundation of the belief that the federal funds rate would be raised sooner rather than later. However, the sharp drop in May marked the first time since March 2015 that job additions were in five instead of six figures. The additions in that month were even lower than those in December 2013. This was a rude shock to all and had given rise to worries that a rate hike may be pushed beyond 2016.
The mining sector has been dragging on job additions for quite some time, which has hurt stocks like Alcoa (AA), Nucor (NUE), and Steel Dynamics (STLD). However, the May report displayed a much wider impact.
However, three successive months of respectable data indicate that the job market is good. It seems to be quite close to full employment, in which case slowing job additions are natural. In fact, if job additions don’t slow, they will risk fueling inflation, which would require swift and sudden rate action from the Fed.
There are a few areas of the market that could use further improvement. Labor market slack and wage growth are two such elements. Though wage growth is acceptable, it’s far from being in the pink of health. A higher increase in wages wouldn’t only be good for stocks (IWF) and consumer spending, it could also help increase inflation and related products (TIP). We’ll look at inflation in the next article.
Source: Market Realist