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.
After the discouraging May report and the unfavorable impact on European growth prospects of the Brexit referendum — as well as the likelihood of further policy easing on the part of at least three systemically influential central banks (the Bank of England, the Bank of Japan and the European Central bank) – fixed-income markets have essentially priced out the possibility of a Fed interest rate hike for the foreseeable future. The current consensus of market participants is that that the Fed will be sidelined well into next year. This forecast has been reinforced by the recent appreciation of the dollar, which serves to tighten financial conditions.
In this environment, a strong jobs report would inject notable two-way volatility into global government bond yields and could put pressure on equities. It would also place the Fed in a trickier position, amplifying a message from the minutes of the June Federal Open Market Committee meeting released Wednesday that pointed to the communication challenges associated with signaling policy intentions amid an unusually uncertain outlook at home and abroad.
Even so, greater market volatility and short-term discomfort for the Fed would be a small price to pay for a strong jobs report that lays the foundation for a more solid footing for American households, encourages business investment and bolsters U.S. and global growth prospects.