July Jobs Report
Written by: Ryan Bouchey
July’s jobs number was reported this morning, and we’re a far cry from the paltry 24,000 jobs (originally thought to be 6,000 before today’s uptick) created back in May. Jobs created in July totaled 255,000, well above the 180,000 expected, marking back to back months of huge job creation. This is welcome news especially considering the weaker than expected GDP number from the 2nd quarter, and is indicative of a resilient economy with room for continued growth.
Thus far, even though we’ve seen a growing stock market since March of 2009 and an unemployment rate which fell to 4.8%, the economic recovery has been tepid. In fact, it’s the slowest economic recovery coming out of a recession ever on a GDP growth percentage basis. All along the rate of jobs growth and the lower unemployment rate was encouraging, however, stagnant wages were disappointing and viewed as a hindrance to future economic growth. The last two employment reports have shown significant growth in average hourly wages, with July matching the strongest annual rate of growth in seven years. The U.S. consumer makes up approximately 70% of overall GDP growth, so stronger wages have a tremendous impact on the overall economy.
This latest reading could certainly impact whether or not the Federal Reserve feels it’s appropriate to raise short term interest rates. Between the weak May jobs number and a bad 2nd quarter GDP growth number, a rise in interest rates seemed unlikely this year. Continued jobs growth and minimal impact from global uncertainty (China and Brexit as two examples) could force the Fed to raise rates before the end of the year. The Atlanta Federal Reserve is already predicting GDP growth rate of 3.7% in the 3rd quarter.
As investors, it’s important to take Fed policy into account when assessing your fixed income allocation as well as overall portfolio strategy. We continue to be overweight financials and consumer discretionary, both of which have outperformed following today’s report due to some of the factors mentioned above. We also hold low duration and well diversified bond holdings in the event we do see a rise in interest rates. Because bonds are meant to mitigate risk, we’d much prefer to preserve capital in this environment than to take on undue risk or longer duration than is necessary.
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