Key Points:
- US labor market weakens despite strong job figures in June.
- Income tax receipts contract over past year.
- Disinflation risks dominate.
Despite a range of rate hike rhetoric from the Federal Reserve earlier in the year, it appears as if we have returned to the histrionic debate over whether the Fed will take action in the coming months. However, despite the largely political message that all is well within the broader US economy, the macroeconomic data provides a different perspective.
Over the last few weeks a range of market pundits have pointed to June’s strong jobs numbers as evidence that labor markets are continuing to strengthen and the subsequent need for the Fed to get ahead of the inevitable inflation.
There is no doubt that June’s Non-Farm Payrolls proved highly robust at 287,000 and that this goes some way to alleviating May’s anaemic result. However, the devil is always in the details and the NFP metric provides plenty of room for misreporting and manipulation to suit political ends.
Subsequently, it pays to dig a little deeper into the underlying indicators that can potentially provide alternative reporting points to the job numbers (Note Well: being hired to work 1 hour per week is considered a job creating event in the NFP numbers). In fact, a quick review of some key income and job related indicators certainly provides plenty of scope for undercutting the official number:
1. Personal income tax receipts have declined 11.3% over the past year.
2. The company income tax take has also declined sharply by approximately 16%.
3. Wage growth by some measures is actually negative.
4. The excise tax take has declined 0.8%.
5. Federal Withholding tax receipts fell sharply in June.
6. Falling job openings numbers (see US JOLTS numbers).
7. Sales tax revenues have only increased a little over 2.5% which is the slowest growth rate in over three years (state sales tax).
Subsequently, a cursory review of these data points seems to suggest that we are not dealing with a labor market sector nearing full employment but rather one that is either static, or indeed contracting.
It would appear that most of the strength in job numbers has mainly been driven by growth in the part time/casual labor force and therefore contributes little in the way to the headline inflation numbers. In fact, despite protestations otherwise the US economy is being subjected to the very forces that are causing disinflation elsewhere throughout the world.
Given the Federal Reserve’s predilection with broader labor market strength it therefore makes plenty of sense for them to delay any subsequent hikes to the Federal Funds Rate (FFR) until some sharp improvements occur.
Namely, the job markets needs to create full time roles, rather than the current casual employment relationships that have skewed the NFP numbers. Otherwise, there will be little in the way of wage growth and inflation to point at in support of rate hikes.
At this juncture, it seems relatively clear that the FOMC is patently aware of the problems within some of the job reporting metrics and is actively looking at other measurements to gauge the sector’s strength. Regardless, they need to do a better job at communicating these changing expectations given that the capital markets are now facing a return to uncertainty over future rate hikes.
Ultimately, the Fed will not hike rates in August and is unlikely to seriously revisit the question for the remainder of Q3 given the mounting risks to the global economy. However, the game now appears in play where they keep us all guessing in the interim whilst attempting to release some of the pressure they have created in various asset classes. Subsequently, watch for plenty of jawboning from the Fed in the coming months but without decision action.