July Jobs Report Shows Growth, but Wages Stubbornly Stagnant
The one missing ingredient at this level of unemployment remains the stubborn refusal of wages to increase in a meaningful way. The last time the unemployment rate was close to this low, in 2007, wages were growing between 3.0-3.5 percent on a twelve-month basis. It should be noted, however, that back then core inflation was running between 2.0-2.3 percent as measured by the Personal Consumption Expenditure (PCE) deflator, not the 1.5 percent pace of this past June.
We will see how consumer prices started out the third quarter on Friday with the July Consumer Price Index report. The twelve-month headline rate is expected to edge higher to 1.8 from 1.6 percent in June, while the core rate is expected to be unchanged at 1.7 percent.
As labor continues struggling to participate fully in this recovery, shareholders are the beneficiary. Profit margins remain high, and corporate earnings are exceeding expectations. Second quarter earnings season is now roughly 90 percent complete, and according to Factset, S&P 500 companies in the aggregate are reporting an increase in margins compared to last year.[i] And earnings are likely to grow by 10.1 percent when full second quarter results are in, well ahead of the expected 6.4 percent pace at quarter end. Only the consumer discretionary sector is expected to see a decline.
The third quarter looks less promising. Estimates have been lowered since the end of the second quarter, as expectations for the energy sector in particular have been reduced along with the price of oil. Earnings in the third quarter are now expected to grow by 5.6 percent, down from 7.1 percent on June 30. But it should be noted that third quarter estimates are now lower for all but technology and telecom, which is still expected to suffer a decline, just of somewhat lesser magnitude. Nevertheless, current estimates of 9.5 percent for the full year have remained relatively steady.
Despite the robust July jobs report, bond yields fell for the week. The ten-year note closed at 2.26 percent, down from 2.29 the prior week, although it did bounce off its lows following the jobs report on Friday. The two-year note rose just one basis point on the week to 1.36 percent. The dollar rebounded sharply after the jobs report as well, arresting for the time being its year-long decline. Stocks edged higher, with the S&P 500 adding just 0.2 percent to close just one point shy of the record set the week before. The Dow Jones Industrial Average did manage to set another new record high at week’s end, its eighth consecutive record close.
Congress is in recess until after Labor Day, and with earnings season winding down, equity investors will be grasping about for something to fill the void as we get into the historically-weak months of August and September.
Beyond the price reports, this week’s economic calendar in the U.S. is fairly light. In the Eurozone, the week began with a softer-than-expected industrial production report from Germany, while in Japan leading indicators were a little better than expected. OPEC meets for two days at the start of the week to review compliance with production cuts. Several Fed officials will be making public comments this week as well, and the often-enlightening Jackson Hole symposium sponsored by the Kansas City Fed is just three weeks away.
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The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The personal consumption expenditure (PCE) measure is the component statistic for consumption in gross domestic product (GDP) collected by the United States Bureau of Economic Analysis (BEA).
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
Indexes are unmanaged and are not available for direct investment.
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