Sharp jump in US employment boosts prospect of rate rise

US employers hired far more workers than expected for the second straight month, providing the firmest evidence yet that a jobs recovery is fully back on track and keeping alive the prospect of a Federal Reserve interest-rate increase later this year.

Payrolls expanded by 255,000 in July, according to the Department of Labor, after growing by an upwardly revised 292,000 in June. The July reading easily topped forecasts that payroll growth would come in at 180,000.

The unemployment rate held steady at 4.9 per cent, but another carefully watched indicator of employment health – the labour force participation rate – rose for a second month. The increase to 62.8 per cent from 62.7 per cent in June showed more people are being drawn off the sidelines and into work.

Fed in wait-and-see mode

The Fed has been in a wait-and-see mode in recent months as it weighs mixed readings for the domestic economy and hazards in Europe and China. A dismal US jobs report in May raised questions about the health of the economic recovery, but the new data will scotch the notion it is faltering.

Fed policymakers have one more set of jobs figures before their September meeting, which has been earmarked by some economists as a potential moment for an upward move in rates, which would be only the second increase since the financial crisis.

The Fed has to reconcile strong hiring trends with subdued economic growth, with US gross domestic product increasing at an annualised pace of just 1.2 per cent in the second quarter.

In addition, the new jobs data continued to show weak growth in wages. Average hourly earnings grew 2.6 per cent over the year, matching the cyclical high reached in December. That comfortably exceeds the core inflation rate of 1.6 per cent but is still below the rates of wage growth seen before unemployment peaked during the last downturn.

Weak output growth

“The problem facing the Fed is that the ongoing robust rate of job creation is taking place against a backdrop of weak output growth, suggesting productivity and profit margins are likely to be suffering,” said Chris Williamson, an economist at IHS Markit.

“The strong employment reports in the past two months increase the motivation for the Fed to increase rates in September, though in our view a post-election hike is still more likely,” Gad Levanon of the Conference Board said.

Firm jobs numbers could also play in the intensifying presidential campaign. Democrats have been attempting to portray an upbeat picture of the US economy to bolster Barack Obama’s legacy.

Donald Trump, the Republican nominee, has been warning of national economic decline, with his campaign suggesting official unemployment data understate how many people are out of work. – (Copyright The Financial Times Limited 2016)