The U.S. economy needs the monthly employment data that will be released on Friday to include a rebound in job creation, higher wage growth and an increase in the labor participation rate. That is also what the Federal Reserve and investors need to enable both the orderly normalization of monetary policy over the long term and sustainable improvements in economic and financial well-being. Yet, ironically, the immediate effect of an upbeat jobs report would be to add confusion to markets and policy-making, which are already coping with ”unusual uncertainty.”
The June report will shed light on whether the surprisingly disappointing data for May released a month ago was indicative of a weakening of the labor markets or just an outlier (as I hope it was). As a result, even greater attention will be paid this time to job-creation indicators, including the headline number for June and the revisions to previous months.
Yet those figures are far from the only important ones. Equally significant will be whether the report points to more buoyant wage growth, and what it says about how quickly the labor participation rate can reverse its May decline and definitively break with a level that is uncomfortably close to its multi-decade low.
Successive months of solid results in these three areas are a requirement for delivering a more robust and sustainable economic recovery, validating existing asset prices, reducing the risk of future financial instability and fostering the orderly normalization of Fed policies over time. In short, they are necessary preconditions to sustaining medium-term well-being and prosperity. But in the short run, further gains could be disruptive for markets and create another conundrum for the U.S. central bank.