Economic outlook mixed after report on employment

Many analysts foresee further interest rate increases.
MARKETWATCH
WASHINGTON -- The U.S. labor market was stronger in June than indicated by the tepid 121,000 growth in nonfarm payrolls.
The data from the Labor Department released Friday paint a muddled picture. While job growth of 121,000 was less than the 175,000 expected by economists and far less than the 390,000 projected by the ADP index, other aspects of the report show a healthier labor market.
"Everything else in the report showed strength," said David Greenlaw, an economist for Morgan Stanley.
In contrast to the weak payroll survey, the household survey showed robust job growth of 387,000 in June, keeping the unemployment rate at a very low 4.6 percent. The number of hours worked rose smartly, and average pay increased. The number of people who've been out of work longer than six months dropped by 217,000 to 1.1 million. The labor force participation rate rose by a tenth of a percentage point to 66.2 percent.
Thus, while the report gives some support for a pause in interest rate increases by the Federal Reserve, it's no slam dunk. Financial markets were pricing in odds of about 59 percent that the Federal Open Market Committee would raise rates on Aug. 8, down from a 70 percent chance earlier.
Most economists also expect a rate increase. Irwin Kellner, chief economist for MarketWatch and chief economist for North Fork Bank, told MarketWatch that he now expects an increase in August.
Of most concern to the Fed, inflationary pressures mounted in June. Average hourly earnings rose 0.5 percent to $16.70. In the past year, earnings are up 3.9 percent, the biggest gain since June 2001. But wages are still lagging behind consumer price inflation, which is up 4.2 percent in the 12 months ending in May.
"This report gives some additional ammunition to those FOMC members who have been arguing that inflation risks are more worrisome than risks of a more significant deceleration in growth," said Roger Kubarych, an economist for HVB.
The average work week increased to 33.9 hours, while total hours worked in the economy rose by 0.4 percent, equivalent to about 500,000 more full-time jobs.
The combination of longer hours, slower growth and higher pay could mean unit labor cost accelerated while productivity dropped in the second quarter. Last week, the FOMC specifically mentioned strong productivity gains and flat unit labor costs as factors helping to keep inflation under control.
"This is seriously bad news for corporate earnings, and we remain very nervous about forecasts for double-digit earnings per share growth" next year, said Ian Shepherdson, chief U.S. economist for High Frequency Economics.
Second survey
The household survey continued to outperform the payroll survey in June. The household survey, which is used to compute the unemployment rate, has reported average job gains of 230,000 over the past year, compared with the 169,000 reported by the payroll survey.
While the two surveys measure slightly different things, economists say the payroll survey is a more accurate gauge of the labor market. But the household survey cannot be completely ignored.