July Labor Report Increases Chances of US Fed Rate Hike

The US economy might be shrugging off the election year fever to continue gliding on in a positive upward trajectory. In past, during the years when we have the US presidential elections; and especially when the incumbent is leaving the office the markets tend to cool off. However, if the employment data for July 2016 released by the Labor Department is anything to go by, then the US economy is proving to be more resilient than most economists expected.

According to the US labor report for the month of July 2016, the US economy created 255,000 more jobs within the month. This was a very high record which went beyond all forecasts by different economists. Economic analysts surveyed by CNNMoney had predicted an average of 182,000 new jobs for the month of July; which is above the 180,000 new jobs estimates from a general pool of economists surveyed by other research firms. With the rise in the jobs created in the month of July, the US economy is sending a strong message that its business people are having a positive outlook into the future and are less worried about the slow global economic growth.

The positive news at the beginning of the second quarter of 2016 caused a stir in the financial markets. Equity markets rallied upwards to factor in the positive economic data and the implied optimism from the US public and private sector. Analyzing the July 2016 labor report,  AOMarkets noted that, “The chances of the Fed raising interest rates before year end have tipped back upward, pointing to a possible hike in September, but better odds of such a change occurring remain more distant. On the whole, the jobs report was a much needed relief for a suddenly-reeling US economy.”

After hitting an all-time low in job creation in the month of May, the second consecutive growth in employment numbers is a big stride in the right direction for the US. In 2015 the monthly average number of new jobs created stood at 229,000 which higher than this year’s 179,000. The effect from the outlier in May low numbers could be pulling down the average and we can only wait to see what the coming months have in store to get a clearer and better comparative figure for 2016.

The services sector led by professional and technical services was highest in job creation; creating 70,000 new jobs. The health sector created 43,000 new jobs, while leisure and hospitality created 45,000 new jobs. The public sector which entails government and government agencies created 38,000 new jobs; adding to the list of top gainers for the month of July 2016. On the other hand, the logging and mining sectors experienced a drop in jobs of about 7,000 within the same period of one month.

Payrolls also showed an improvement with an average increase in the hourly wage rate by USD 0.08, which translates to about 2.6% annualized growth rate. Working hours also increased by about 0.1 hours per week to average at 34.5 hours a week. This could potentially explain the increase in wages as a result of increased productivity by working for more hours. Labor participation also rose with small margins to 62.8% from 62.7%. Generally all the data released painted a very positive picture of the US economy compared to its peers globally.

Other major global economies are slowing down and implementing economic policies meant to stimulate their countries to increase production and create more jobs. Britain cut its lending rates by 25 basis points from 0.5% to 0.25% for the first time in seven years. It also unveiled other quantitative easing strategies meant to increase money supply in their economy to push up demand and fuel consumption driven economic growth. The Reserve Bank of Australia also cut its lending rates with a similar objective of stimulating consumptions to boost growth.

On the other hand, the US seem to be moving in the opposite direction having intimated that they it will be raising its interest rates most likely in September. The odds for a rate hike in September rose to 18% from the previous 12%; and the odds for the hike before year end rose to 46.5% from the previous 34.4%. Both probabilities however remain below 50% hence more positive economic news need to come forth to justify a rate hike.