The Labor Department announced today that the U.S. economy added 162,000 jobs in June and that the unemployment rate fell two-tenths of a percentage point to 7.4%. The feds also said that job growth in April and May was slower than initially thought, with 23,000 fewer jobs being added than was previously reported.
The headline job growth number represents fairly solid overall growth. That figure is still ahead of the 75,000 to 125,000 jobs needed each month to stay ahead of population growth, even if it falls short of the 200,000 per-month job growth we’ve seen recently.
But for market participants, this jobs report most likely raises more questions than it answers, mostly because it’s difficult to tell exactly how the Federal Reserve will react. Previously, Fed Chair Ben Bernanke has said that a 7.5% unemployment rate is an important threshold, below which the central bank would consider slowing the pace of its bond purchases, popularly known as “quantitative easing.”
Though the significant drop in the unemployment rate looks like great news, the data underlying today’s report paint a checkered picture. The two headline figures in the employment situation report — the total number of jobs added and the unemployment rate — are drawn from two different surveys, of companies and households respectively. And according to the household survey, the labor force shrunk by 37,000 people, a dynamic that helped drive down the unemployment rate.
The so-called “labor force participation rate” or the ratio of folks in the labor force to the total working-age population declined by 0.1%, a reversal from previous months when the participation rate had been creeping up. This number is a key metric that economists will be watching going forward to measure the health of the job market.
As I’ve written previously, the participation rate has been on the decline for more than a decade as the number of retired Americans increases due to a generally aging population. But the weakness of the economy has caused this decline to accelerate, as some Americans choose to stay in school longer or opt for early retirement simply because the lack of good job opportunities.
Other metrics that are cause for concern include average hours worked and average hourly pay, both of which declined by 0.1 hours and 2 cents, respectively. It’s in these numbers that we may be seeing effects of sequestration-related budget cuts, as many government agencies have decided to put workers on one-day-per-week furloughs in lieu of laying off workers entirely.
Bernanke has said that the unemployment rate isn’t the only figure he’ll be looking at when deciding when to scale back stimulus. As today’s report shows, a drop in the unemployment rate can be caused as much by a shrinking labor force as by a robust and growing economy. Many market watchers had been expecting that the central bank would announce a tapering of its quantitative easing program after its meeting in September, and one could find evidence in today’s report that the Fed will stick to this timeline, or that it will decide to wait a few months before tapping the breaks.