US Economy: Jobs Beat Expectations

Figures recently released show that the US economy created 195000 new jobs in June. The figure surpassed analyst’s expectations which projected some 30000 fewer jobs would be created. Further good news was provided from the revision of data for April and May which revealed that a further 70000 jobs had been created than previously thought. Whilst this is undoubtedly good news for the individuals involved, the overall level of unemployment in the USA remains unchanged at 7.6%, indicating that the recovery is still struggling to really get going. Unemployment is a lagging indicator of the economic cycle and will only improve when businesses are confident of an increased demand for their goods or services.

Markets reacted positively to the news, but the yield on government bonds has increased, making borrowing more costly. The reason for the hike is that investors think that improved unemployment means that the Federal Reserve is likely to increase interest rates from their historic lows as early as the end of next year. Given that the unemployment rate has remained unchanged and that the Federal Reserve has made it clear that employment would need to fall below 6.5% before any softening of accommodative monetary policies would be considered, this does seem a little premature.

The new jobs created were mainly in the hospitality and leisure sectors as employers took on staff to cater for increased demand in the summer season, so the fear is that these posts will only be temporary, falling like leaves from the trees when autumn has the nation in its grip. The manufacturing sector, which is not seasonal, continued to down-size the workforce despite promises from President Obama to help it to engage a million new workers during his current term.

Some suggest that the better job creation figures indicate that the job loss fears over the “sequester” where over-played. The government removed 7000 people from the Federal payroll in June which was less than anticipated, but goes to show that the sequester is indeed having a negative impact on employment. It is impossible to de-convolute the effect of these mandatory cuts on employment. Had it not taken place, job growth might have been real (in terms of the underlying unemployment rate) rather than static.