Will strong payrolls report mean no Fed rate cut?

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Nonfarm payrolls rose 224,000 in June, more than expected, throwing cold water on expectation that the Federal Open Market Committee will cut rates at its July meeting.

“This growth exceeds expectations by a significant margin and is in line with the rate of growth we’ve seen so far in 2019,” according to Beth Akers, Manhattan Institute senior fellow and former Council of Economic Advisors economist. “This news may quell fears of an economic slowdown that were stirred up by the disappointing news last month of the economy adding only 75,000 jobs in May.”

“This morning’s robust jobs report should ease some of the pressure that the Fed faces to cut rates at the upcoming July FOMC meeting,” according to Doug Duncan, chief economist at Fannie Mae.

Economists polled by IFR Markets were expecting 160,000 jobs to be added after a weak May, where only a downwardly revised 72,000 jobs were added.

Private payrolls gained 191,000, above the 150,000 predicted, while the unemployment rate ticked up to 3.7% from 3.6% the prior month, the Labor Department reported Friday.

Average hourly earnings gained 0.2% in the month and 3.1% year-over-year, a tick under the projections, while the average workweek held at 34.4 hours, as expected.

“The strong rebound in job growth in June is encouraging, and, we suspect that the rebound would have been even larger were it not for the Trump administration’s unexpected tariff threats on imports from Mexico in early June that probably made some firms hesitant to proceed with hiring plans,” said Berenberg Capital Markets U.S. Economist Roiana Reid. “Continued solid job growth bodes well for consumption growth, which is the primary driver of U.S. GDP growth. We believe underlying job growth is closer to 150k than it is to 224k, but it is obvious that the potential labor supply is larger and more elastic than commonly assumed. There is remaining slack in the labor market.”

And if about 110,000 jobs are added each month, that would be enough to hold the unemployment rate at 3.7%, “assuming an unchanged labor force participation rate,” she said.

“Initial trading on the stock market indicated a negative reaction to this news, reflecting a perception that it reduced the likelihood of a rate cut from the Federal Reserve in July,” Akers of the Manhattan Institute said.

The report also shows how the nation no longer has a manufacturing mentality.

Manufacturing employment growth has slowed by 0.8 percentage points over the last year but total nonfarm payroll growth is only down by 0.1 percentage points,” noted Brian Coulton, chief economist at Fitch Ratings.

He believes this report means the Fed will hold rates steady later this month. “The U.S. expansion is indeed slowing down but it has not hit a wall. The market is going to be disappointed by how much monetary easing the Fed will deliver.

But at least one analyst still sees the Fed cutting rates. “We still expect the Fed to proceed with its ‘insurance rate cut’ at the July 30-31 FOMC meeting,” Reid said. “The solid June Employment Report supports our expectation for a 25 basis point rate cut in July rather than a 50 basis point cut.”

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