June Jobs Report Shows Steady Improvement

July 5, 2013 — -- The Labor Department reported unemployment stayed steady at 7.6 percent as 195,000 jobs were added, an improvement from the slow but steady growth that's become the norm since the last recession.

All eyes are on the Labor Department's employment report and the labor market since the Federal Reserve has tied the tapering of its bond purchase program in part to the unemployment rate.

Robert G. Murphy, economics professor at Boston College, expected a gain of about 165,000 jobs in June.

"This morning's employment report showing a jobs gain of 195,000 is good news that the recovery may now be on a sustained path," he said. "Combined with revisions to the two previous months gains totaling 70,000 additional jobs, the latest number certainly is reassuring. But the job gain merely kept pace with the rise in the labor force, so that the number of unemployed, at 11.8 million, was essentially unchanged. Greater gains in jobs will be needed to push unemployment down significantly over the next year."

Some negative news in June's report is that part-time work -- because of "slack work or business conditions" -- is up over 350,000 from May to June. In addition, the number of discouraged workers now tops 1 million, up 247,000 from May to June.

As expected, the average workweek stayed steady at 34.5 hours. Average hourly earnings increased by 5 cents to $20.14 after being unchanged in May.

Last month, the Labor Department reported an unemployment rate of 7.6 percent with the addition of 175,000 jobs in May, which was revised to 195,000. Job additions for April were revised to 199,000 from 149,000.

"Despite the healthy growth from private companies (many are growing sales by double digits), looking at today's report, the unemployment rate is still not where we'd expect it to be at this point in the recovery. Despite strong balance sheet and income statement performance, many companies remain very resistant to increasing their overhead by hiring and taking on debt," said Brian Hamilton, chairman of Sageworks.

Recent comments by Federal Reserve chairman Ben Bernanke, which clarified the Fed's asset purchase policy without a change in policy, have set markets on edge, so that Friday's report likely is receiving much greater attention than it probably warrants, Murphy said.

After this report, Murphy said the Federal Reserve is "unlikely to begin removing stimulus at its July meeting."

Murphy said the report needs to be placed in the context of "a recovery that continues to be very sluggish." Last week, the Commerce Department reported a downward revision for first quarter GDP growth of 1.8 percent and a consensus growth forecast of 2.5 to 2.8 percent over the rest of this year. Murphy said those figures are not high enough to sustain job gains consistent with a decline in the unemployment rate toward the 7 percent marker that Bernanke has indicated for ending the asset purchase program, provided inflation doesn't spike.

Read More About the Fed's $85 Billion a Month Bond Purchasing Program

Murphy cautioned that the monthly job gains are subject to statistical error of around 90,000, which may be amplified for June when students and others take seasonal jobs.

"Hence, a strong gain this month would need to be sustained for several months to reflect a meaningful upshift in labor market performance," he said, adding that the average monthly gain of 178,000 in jobs for March to May represents a slowdown from the average gain of 233,000 for December to February.

"So even if the report shows strong employment growth, the Fed is unlikely to decide to begin tapering its asset purchases when it meets later this month," Murphy said. "The Fed will want to wait until its September meeting when it will have employment numbers for July and August in hand."

Stephen Bronars, senior economist with Welch Consulting, said the pattern in the jobs reports of the last year will likely to continue.

"The primary concern that economists have is that this is the new normal for the economy: slow, steady, but unspectacular growth in both GDP and employment," Bronars said.

This "new normal" Bronars refers to employment growth just keeping pace with population growth over the past year as the economy created 175,000 to 180,000 jobs per month. Bronars adds that the unemployment rate has fallen to 7.6 percent from 8.2 percent over the past year largely because people have given up looking for work and are no longer counted as unemployed. Meanwhile, the fraction of adults who are employed has not changed in the past three years because of relatively slow growth and the aging of the U.S. workforce, he said.

Job additions in the leisure and hospitality sector were the strongest at 75,000, about 2.5 times the growth in leisure and hospitality in 2012. Employers in professional and business services added 53,000 jobs.

Employment in June for the construction sector showed little change. Recovery in the construction sector has been "painfully slow," Bronars said.

Although construction employment is up 3.5 percent in the past year -- more than twice as fast as the rest of the workforce -- the sector has regained only about 13 percent of the 2.2 million construction jobs lost in the recession.

"There needs to be much stronger growth in construction employment to signal that economic growth has accelerated," Bronars said.

On Wednesday, two reports showed signs of optimism for the labor market.

Private payroll provider ADP said companies added 188,000 jobs in June, the largest gain since February and up from 134,000 in May. Construction employers added 21,000 jobs, a possible indication that a housing recovery is boosting job growth.

Also on Wednesday, the Labor Department reported the number of Americans filing unemployment claims fell 5,000 to a seasonally adjusted 343,000.

Last week, the S&P/Case-Shiller survey of 20 major metro areas reported a strong increase in average home prices with prices rising in all the cities it tracks; and the Commerce Department reported new home sales rose in May to the fastest pace in five years

Joe "JJ" Kinahan, chief strategist with TD Ameritrade, said the overall headline number in June's report was "fantastic".

"The market has held its tremendous overnight gains and all in all it looks to be very positive for equities," he said, while "the bond market has taken it on the chin" as ten-year yields have pushed to almost 2.65 percent.

His concern, he said, is "that we keep this great momentum going forward and that we have a better quality of jobs created."