America’s labour market has put May’s hiccup behind it. Only 24,000 jobs were created that month, but both June and July saw unusually strong growth in payrolls. They expanded by 255,000 in July, following a 292,000 jump in June. The unemployment rate remained steady at 4.9%, but only because more people entered the labour market.
Job growth at this rate “cannot persist for much longer without generating lots of… wage growth”, says Economist.com’s Free Exchange blog. Average earnings edged up to an annual rate of 2.6% last month. From June to July, they increased at an annualised pace of 3.8%.
Goldman Sachs points out that the economy needs to generate 85,000 jobs a month to keep up with population growth. It is currently adding jobs more than twice as fast. The slack in the labour market will be used up at an unemployment rate of 4.7%, Goldman reckons.
Wage growth should keep climbing, agrees Longview Economics. Job openings, which measure the demand for labour, have risen above the level of new hires, implying that new job positions are opening more quickly than they are being filled. Small business compensation plans are at fairly high levels too.
This suggests that inflation in the services sector, already at a multi-year high of 2.9%, will climb further. Credit growth also tends to be a harbinger of inflation, and it is accelerating. Nevertheless, markets aren’t expecting a rise in interest-rates this year; the odds of a rise in December are under 50%, interest-rate futures imply. Investors may be in for a nasty surprise.