Bond market performance in June was lackluster as rates were essentially unchanged for the month.
For those espousing the fragility of the economic recovery and supportive of continued emergency monetary policy, the June employment report must have been a shocker. That constituency is dwindling given the continued robustness of job growth. As was reported earlier this month, the economy added 288,000 jobs in June, the fifth consecutive monthly gain in excess of 200,000. Moreover, the twelve and twenty-four month average monthly gain of new jobs is more than 200,000. Of those 200,000, 100% represented net new job entrants as the labor force has essentially remained unchanged over the last two years. With that, the 2.4 million new jobs added annually has directly impacted the unemployment rate, which is borne out by the drop in the rate from 8.2% on June 2012 to 6.1% as of last month. Should the economy continue to add 200,000 a month for the next year and the labor force remains unchanged, the unemployment rate will fall to 4.5% by next June. That level would approximate the lowest rate in two decades. A continued fall in unemployment is likely to translate into stronger economic growth as the newly employed spend their wages on essential and discretionary items. Similarly, as the unemployment rate falls and the pool of available workers shrinks, workers are better positioned to demand above average wage increases. Economic theory holds that such a condition would result in demand pull inflation as a heightened level of money chases a steady supply of goods. That condition could be exacerbated by the massive supply of money engineered by the Federal Reserve.
Just as evidence of the shrinking pool of available workers can be found in the unemployment rate, the lesser followed Job Openings and Labor Turnover Survey (JOLTS) report has steadily risen since bottoming in 2009 and now indicates that as of May, there are 4.6 million job openings in the United States. Tech companies are struggling to fill highly skilled engineering jobs and say that it can take up to four times as long to fill a skilled engineering job versus the time it takes to fill a non-technical position.
In addition to employment, manufacturing, as measured by the purchasing managers index, continues to expand at a robust pace. Similarly, the pace of new home sales rebounded smartly in May, selling at an annualized pace of more the 500,000. Also during the month, it was reported that the Consumer Price Index rose 2.1% year-over-year, crossing the 2.0% threshold targeted by the Federal Reserve. If only the actual rate of inflation was 2.1%. In an informal survey of clients and colleagues, not a single person thought that their cost of living was 2.1% or lower than the same level last year.
Taken in aggregate, one would think that robust job growth, healthy manufacturing growth, improved home sales, and rising inflation would be enough to prompt the Federal Reserve policymakers to end their emergency monetary policy immediately. Instead, Chair Yellen has communicated that the pace of quantitative easing will continue to be tapered until it ultimately concludes this fall, and has assured the public that the first hike is still some time off. We continue to believe that this is a serious policy mistake. Conventional knowledge holds that a change in monetary policy takes twelve to eighteen months to affect the economy. If, as outlined above, the unemployment rate falls below 5.0% by next year the Fed will find itself well behind the curve and will need to act more aggressively when it ultimately decides to raise interest rates.