US June nonfarm payrolls and the case for a September start to normalisation

As the pivotal September FOMC meeting draws ever closer, the magnitude and quality of job gains becomes all the more important. Key from the June post FOMC meeting press conference of Chair Yellen was: (1) her strong belief that labour market conditions had improved markedly in recent years; (2) equally that there was a need to see further improvement in conditions before the process of interest rate normalisation commenced. 

In the June employment report, we will find evidence broadly in favour of ongoing cumulative improvement, albeit (continuing the 2015 trend) at a slower pace than was seen during 2014. The June nonfarm payrolls result was healthy, coming in at 223k - a touch below market expectations. And the unemployment rate fell to just 5.3%, as the participation rate reversed its May rise - falling 0.3ppts in the month. 

More important than these spot outcomes is the multi-month trend in job creation and the degree of perceived labour market slack. Despite the 60k downward revision to April and May, the average monthly nonfarm payrolls job gain for 2015 still stands at 208k. While lower than 2014's 260k average, it equates to an annualised job gain of 1.8%, well and truly eclipsing population growth over the same period of 1.3%. With respect to labour market slack, the key benchmark for FOMCdeliberation remains the unemployment rate. 

The apparent tension between seemingly full employment and relatively soft nominal wage gains is resolved when one considers the other major measure of slack: the employment-to-population ratio. Having been brought to historic lows not only by the job losses of the post-GFC recession but also by the sharp decline in participation to end-2013, it has only edged higher since. This result implies there remains a large pool of marginally-attached workers which could be brought back into the labour market, if conditions were favourable. That many of these could-be workers are in primeworking age groups highlights both their availability and potential productive use by the economy. 

For the FOMC, the challenge is to continue to foster healthy job gains without causing the returns that firms receive from employing to be depleted by wage pressures. Consequently, having seen the unemployment rate fall to 5.3% and given job gains are continuing, conditions are conducive to begin interest rate normalisation. Through this data-dependent (likely very slow process), committee members aim to foster further sustainable growth in activity and jobs, incentivising participation and productivity. A September commencement and cautious normalisation remains most likely