US: Job growth naturally slowing as we enter the mature stages of the cycle – RBC CM

Research Team at RBC Capital Markets, suggests that despite a plethora of job metrics that remain largely constructive (firming withheld tax receipts, jobless claims back to the lows, a much more stable ADP report, to name some), the May employment report was surprisingly weak with headline/private NFPs coming in at just 38/25k.

Key Quotes

“This came with downward revisions totalling -59k and a diffusion index that printed a multi-year low just north of the breakeven 50 mark. To be sure, we think this report represents an aberration and not the beginning of a sharp downtrend. Job growth is naturally slowing as we enter the mature stages of the cycle, but not to the extent this latest report suggests. One thing that did not shift is the reality of wage pressures. This is not only evident from a job leavers’ rate that remained near cycle highs (this “quit rate” proxy leads wage growth by multiple quarters) but average hourly earnings that somehow managed to print on consensus of +0.2% and witnessed an upward revision to +0.4% the prior month.

More broadly, even if job growth slows to 175k from here (which is certainly plausible given the maturity stage of the current expansion and secular demographic trends that inhibit labor force growth) this shakes out to a 1.75% y/y run rate by December. Which means, you still get aggregate wages (the combination of headcount, hourly earnings and hours) running near 5% nominal at year-end. With topline inflation near 2% by then (if current oil futures prices hold), that’s still a compelling dynamic for REAL consumption growth and commensurately topline GDP.”