The July jobs report put to rest lingering fears of a downshift in U.S. job growth that were amplified by a weak May employment report. A strong 255,000 net new jobs were added to the U.S. economy in July following a blowout 292,000 net new jobs added in June. Beyond the positive payroll data, most other key labor market metrics improved in July as well. Average hourly earnings increased, as did average weekly hours. So we can say that more workers worked longer hours and got paid better for it in July. This is the trifecta for income growth which, in turn, is supportive of consumer spending. We can also say that the labor market is pulling in more workers from the sidelines. The civilian labor force in July 2016 was 1.4 percent larger than it was in July 2015, well above estimated population growth of 0.8 percent. This has brought the total labor force participation rate up from a low of 62.4 percent in September 2015, to 62.8 percent in July 2016. Strong growth in the labor force kept the unemployment rate steady at 4.9 percent in July. The rate of decline in the unemployment rate is easing. We expect the lower bound to be in the neighborhood of 4.6 percent, but it could end up being one- or two-tenths of a percent higher, meaning we are getting close.
Despite the positive signals from labor-related data, the Federal Reserve still looks set to sit on their hands in September. As of this writing, the fed funds futures market places only an 18 percent chance for fed funds rate hike at the next Federal Open Market Committee meeting over September 20/21. Fed Governor Jerome Powell, speaking last week, urged patience for those anticipating higher interest rates. We are maintaining our expectation of only one fed funds rate hike this year, coming at the conclusion of the December 13/14 FOMC meeting.
Even by staying in place, Federal Reserve monetary policy is looking relatively tighter compared with other central banks. Both the Bank of Japan and the Bank of England have recently eased policy. The Bank of Japan’s Monetary Policy Committee voted on July 29 to leave their benchmark lending rate unchanged, but they did increase their pace of asset purchases, including exchange-traded stock funds. The yen, which had been gaining strength against the dollar through most of this year, has not weakened as Japanese officials may have wished, but it has stopped appreciating, at least temporarily. The Bank of England dropped its bank rate to an all-time low of 0.25 percent on August 5 and they started buying corporate bonds in addition to their existing program of UK government bond purchases. The British pound had been relatively stable this year against the dollar, but weakened significantly on the news. According to the BBC, tourist travel to the U.K. has already increased as a result of the weaker pound.
Another key reason why the Fed may choose to pause again in September is the less-than-expected inflationary push from oil prices. After peaking in early June above $52 per barrel, the price of WTI crude oil sank to below $40 per barrel by early August, before recovering to $43 per barrel as of this writing. Higher-than-expected inventories of both crude oil and refined products, particularly gasoline, have dampened expectations for higher crude oil prices by year- end. And that means less inflation and less need for the Fed to get out in front of rising inflation with an interest rate hike. We are using a year-end price of about $48 per barrel in our August U.S. forecast.
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