Payroll Report Gives Little Ammo to Fed Hawks

The ever-important payroll report came in ahead of expectations for June, but will ultimately do little to sway policy in toward the hawkish faction of the Federal Reserve Board. The headline non-farm payroll figure name in at 850K in June, ahead of expectations for 720K new jobs. But, we have to dig deeper into the numbers to get a better sense of “how” payrolls surprised to the upside. Indeed, private payroll additions were 662K for June, only 47K above expectations. The real “beat” was in public sector payrolls, specifically education, which registered 188K additions versus just 67K in May. Moreover, manufacturing payrolls only increased by 15K in June (a fairly anemic number even if affected by semiconductor shortages) and the bulk of private job creation was concentrated in retail and leisure & hospitality.

Now, there is nothing inherently wrong with adding jobs in public education, retail, or leisure & hospitality. Indeed these areas were some of the hardest hit with job cuts during the height of COVID lockdowns a year ago. We should thus see continued job growth in these areas. In fact, we NEED to see continued job growth in these areas to get back anywhere near pre-pandemic employment levels. What these areas are not, however, are high productivity sectors. That’s why, for example, average hourly earnings only increased by 0.3% MoM, which is broadly in line with monthly earnings increases from 2010-2019. Since inflation is running MUCH hotter than average hourly earnings, real average hourly earnings remain at basically the most negative levels on record. A wage/price spiral this is not – at least not yet. What it is more akin to is stagflation.