Payrolls Beat Consensus On Resilient Unemployment

The US economy added 195,000 jobs in June as reported today by the Labor Department on its Employment Situation report. The number beat the mean consensus of 161,000 and ignited a market rally, even though it later lost some steam as many investor are out for an extended weekend, after the 4th July break.

The Labor Department also revised prior numbers, adding an extra 70,000 jobs gain to past reports. May payrolls increased by 195,000 instead of the previously reported 175,000.

The strength in payrolls numbers comes from the private sector as government jobs retreated by 7,000. With an exponentially rising national debt around 17 trillion, government had to incorporate many cuts on its budget since the start of the year which are weighting negatively on job creation, but the FED’s asset-buying program along with low interest rates have been driving money to the stock market and making it easier for companies to deploy money into new projects and thus hiring.

Since being severely hit by the financial crisis of 2007-2009, payrolls have been increasing for 33 straight months with the average gain over the last 12 months being 191,000, a number that is very near the 200,000 threshold usually seen as the number that makes for a sustainable decline in the unemployment rate.

In terms of unemployment rate the gains haven’t been as good as with payrolls and the latest number on the report showed an unchanged rate at 7.6%., similar to its level in March. Unlike other economic variables, the unemployment rate is usually resilient to decline. After hitting 10.0% in October 2009 at the peak of the crisis, gains in the job market have been frustratingly slow. Over the last 12 months, the unemployment rate went down from 8.2% in June last year to just 7.6% on this last report, which is much less than desired.

The Federal Reserve pledged to keep its asset-buying program around $85 billion a month until there were substantial gains in the economy and to keep interest rates at record low levels until the unemployment rate hits 6.5%. After cutting on its interest rate to 0.25% in 2008 the FED hasn’t touched it for almost 5 years now. The rate is not only a record low but also a record time at such levels, which clearly shows how seriously was the economy hit.

The stock market reacted by rising after the Employment Situation report was released but as futures had already inched 1% higher during the holiday, movements have been relatively erratic during the day and only Monday when investors come with strength we can evaluate the full impact of the jobs report on stocks. By one side, a better than expected number shows a stronger economy which will ultimately drive corporate profits higher and thus stocks but by other side investors also weight the likelihood of the FED tapering on its QE3 sooner than expected which would be a major blow at this point as the global economy is recovering at a slow pace.

The US dollar rose against its major counterparts with EUR/USD trading at 1.2830 and GBP/USD at 1.4905 at the time of writing. Gold was hit again to trade at $1,215 and is out-of-favor in the short-term but we expect it to increase over the medium term.

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