The US job engine is running smoothly, but the return of previously discouraged workers is distorting the picture

The track record for the US labour market in the first half of 2018 looks very pleasing. That has not only been the case since Friday’s publication by the Bureau of Labor Statistics (BLS), but the new report certainly underscores this impression. Nonfarm payroll employment turns out to have risen by 213,000 in June. In accordance with our expectations, the goods-producing sector once again made a visible contribution, adding approximately 50,000 new workers. In our opinion, the simultaneous increase in the unemployment rate from 3.8 percent to 4.0 percent is in no way a cause for concern, and does not therefore mar the decidedly dazzling performance recorded over the first six months of this year.

For one thing, a jobless rate of 4.0 percent is still very low, and it is reasonable to assume that it will allow the Federal Reserve to continue on the path towards normalisation. For another thing, it is probably above all the uncommonly sharp surge in the labour supply which has caused the unemployment rate to inch up again. It emerges that around 600,000 new workers entered the labour force in June relative to May, and US labour supply has increased by an impressive 1.5 million since last December. By way of comparison, growth in the supply of labour came to only 1 million over the whole of last year.

The influx of job-seekers from the „hidden reserve“ appears to have gained fresh impetus from the very low unemployment rate and from persistently solid employment growth, not only in the services sector. Discouraged workers who had turned their backs on the labour market during the last economic crisis are continuing to return. There are thus scarcely any blemishes in the latest labour-market report, especially since it also contains a marginal upward revision to the employment-growth statistics for the preceding months.

However, the ongoing reduction in the hidden reserve is also the reason why it is not possible to detect a strong pick-up in wage pressure even though unemployment is at such a low level. In June average hourly earnings were just 0.2 percent up on the previous month, while the year-on-year growth rate came in flat at 2.7 percent.

The fact that there has been no change in the splendid economic climate suggests that employment growth is going to proceed at a solid pace in the coming months. Burdens imposed by the protectionist measures which are kicking in at the moment will presumably not show up over that time horizon. Subsequently, there is likely to be a very gradual climb in rates of wage growth, as the hidden reserve has already shrunk to a pronounced extent. A number of sectors are already reporting that skilled workers are in seriously short supply.


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