Last month was a real disappointment for job creation, as the U.S. added “only” 223,000 new positions. We have grown accustomed to job creation greater than 200,000 per month – since January 2014, fourteen of eighteen reports have exceeded this level – but the June update was “softer” and failed to live up to economists’ loftier expectation of 233,000. The unemployment rate continued its multi-year downward march to its lowest level since early 2008, 5.3 percent. Headline jobs-created and declining unemployment do not tell the whole story, which explains the media’s downbeat assessment of the report. The labor force participation rate, for instance, declined to its lowest level since the late 1970s after 432,000 people gave up looking for work. Hourly wages did not budge month-over-month, disappointing calls for a modest increase of 0.3 percent. The year-over-year increase in wages remained 2.0 percent, which Federal Reserve chair Janet Yellen recently referred to as a “low level.” The long-term unemployed, those without a job for more than twenty-seven weeks, declined by 381,000, one of the report’s few figures indicating genuine labor market improvement. Our perspective since December 2014 has been that U.S. job creation alone cannot spur domestic interest rates higher. Since we do not see a corresponding increase in wages that might lead to broad inflation, our view remains unchanged. We expect short term interest rates to creep up in the latter half of 2015, as the Federal Reserve eventually increases its policy target. Our portfolios remain positioned to benefit from the gradual convergence of the policy target and market expectations.
Sources: Time Magazine, GS, Bloomberg News, Federal Reserve, SNWAM Research