Brightening jobs picture may draw Fed closer to tapering

Jobseekers talk with recruiters at a Hire Our Heroes job campaign in Washington in this file photo taken on June 11. US job growth was stronger than expected in June, with employers adding 195,000 jobs to their payrolls, the Labor Department said yesterday.

Reuters/Washington

US job growth was stronger than expected in June and the employment count for the prior two months was revised higher, cementing expectations for the Federal Reserve to start winding down its massive stimulus program as early as September.

Employers added 195,000 new jobs to their payrolls last month, the Labor Department said yesterday, while the unemployment rate held steady at 7.6% as more people entered the workforce.

The government revised its count for April and May to show 70,000 more jobs created than previously reported, a sign the economy was on solid ground, despite higher taxes, government spending cuts and signs of weakness overseas.

“The report was the evidence the Fed was looking for to justify their decision to begin tapering purchases before the end of the year,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

Two weeks ago Fed chairman Ben Bernanke said the US central bank expected to start cutting back later this year on the $85bn in bonds it is purchasing each month and would likely bring the program to a complete close by the mid-2014.

Economists polled by Reuters had expected employment to increase 165,000 last month and the jobless rate to fall a tenth of a percentage point to 7.5%.

In the second quarter, job growth average 196,333 per month, in line with the 200,000 jobs that economists say the Fed wants to see each month. For the first-half of the year employment averaged just over 200,000 per month.

In a further bright sign, average hourly earnings rose by the most since November. The report, together with other relatively upbeat data on housing, auto sales and manufacturing, makes it more likely the Fed will proceed with its tapering plan.

“A good guess would be in September, I don’t think they are anxious to pull the trigger beforehand,” said Ray Stone, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey.

Twenty-eight of 60 economists polled by Reuters in late June said they expected the Fed to begin dialing back its purchases in September, and their ranks appeared to grow yesterday.

Recent signals from Bernanke that a start date for reducing bond purchases was approaching triggered a global selloff in stock and bond markets, which have relied on the Fed as a steady source of demand for financial assets.

Stock prices have turned around since then, but bonds have continued to drop. The yield on the benchmark 10-year US Treasury note hit 2.70% yesterday, the highest in nearly two years and up more than a percentage point from early May.

As bond yields have moved up, borrowing costs for both companies and consumers have increased, presenting a fresh headwind for the economy’s recovery.

But economists said the US recovery appeared to have enough momentum to weather the rise in interest rates.

The jobless rate was unchanged last month because the labour force swelled as younger Americans piled in. The Fed has said it expects unemployment to drop to around 7% by the middle of next year, when it anticipates ending its bond purchases.

It was the third consecutive monthly increase in the workforce and it lifted the participation rate - the share of working-age Americans who either have a job or are looking for one - further away from a 34-year low touched in March.

Declining labour force participation as older Americans retired and younger people gave up the hunt for work had accounted for much of the drop in the unemployment rate from a peak of 10% in October 2009.

An even broader gauge of the health of the labour market - the percentage of working age Americans with a job - also rose, reaching 58.7%, its highest level since November.

However, a measure of underemployment that includes people who want a job but who have given up searching and those working part time because they cannot find full-time jobs jumped to 14.3% from 13.8% in May.

Economists said part of the increase reflected the long-term unemployed falling off extended jobless benefits, which have ceased in most states because of better job market conditions.

All the job growth was in the private sector, where payrolls increased by 202,000 after rising 207,000 the prior month. While this is encouraging, more than half of the jobs were in the retail and leisure and hospitality sectors, which typically are relatively low-paid.

Retail jobs increased 37,100 last month after advancing 26,900 in May. Leisure and hospitality employment rose 75,000 after increasing 69,000 in May.

In contrast, manufacturing payrolls fell by 6,000 jobs, declining for a fourth straight month, while construction employment rose a still moderate 13,000.