Sizzling Labor Market Recovery Shifts Focus to Fed Action(8/1/14)

The labor market continued a sizzling pace of economic recovery in July. The economy created 209,000 new jobs while the unemployment rate edged up only incrementally from 6.1% to 6.2%. However, the latter increase occurred only because 329,000 workers enter the labor market over the last month. When so many workers enter or re-enter the labor market, it is an optimistic sign that jobs are increasingly available.

The job gains were spread across all key industries including construction (22,000) and manufacturing (28,000). Private non-goods producing sectors also experienced significant employment gains including retail trade (26,700), business and professional services (47,000) and health care and social assistance (25,400).

One concerning outcome of the labor market picture is the fact that unemployment among Blacks increased notably from 10.7% to 11.4%. However, the increase was caused primarily by over 200,000 Blacks entering or reentering the labor market in July. Unemployment among whites and Hispanics remain constant at 5.3% and 7.8% respectively.

Now that the economy has experienced several consecutive months of strong recovery, economic policymakers will gradually shift their attention to inflation. Specifically, the growing concern will be whether or not the new rapid pace of growth will reignite inflationary fires. There are strong signs this may be the case.

Specifically, the economy produced 304,000 jobs in April, 222,000 and May and 288,000 in June. In fact, the last six months have been the most robust period of job growth in over a decade and a half. Furthermore, over the last several weeks, initial claims for unemployment compensation dropped below 300,000 for the first time since the recession began in 2007. At the same time, the employment cost Index spiked up significantly in recent months as wages and salaries increased by .6% between the first and second quarters. Finally, GDP increased by 4% last quarter.

These indicators are signs that point to a growing concern the Federal Reserve will have over the possibility of inflationary growth. The confirmation of the concern is reflected in the stock market, which declined by 1.9% in just one day. Investors are worried the Federal Reserve will increase interest rates to contain the rapid rate of growth. Rising interest rates will in turn slow down home buying, auto sales and other interest sensitive consumer purchases. If that occurs it will cut into corporate profit

Unfortunately, behind every silver lining there is a dark cloud, and inflationary fears is the cloud that is gaining momentum.