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Strong Jobs Report: Recession off the Table but Is Rate Hike Back On?

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RANDY FREDERICK: Hello, and welcome to the Schwab Market Snapshot for July 12. I’m Randy Frederick.

Well, after the Brexit referendum decline, domestic equity markets have rebounded sharply, and now the S&P 500® is back in record territory. So, today, I’m speaking with Liz Ann Sonders, Schwab’s chief investment strategist, to get her perspective on how the labor market has helped to transform what was seemingly a negative event into a bullish catalyst. Welcome back, Liz Ann.

LIZ ANN SONDERS: Thanks, Randy, and thanks for tuning in, everybody.

RANDY: So, Liz Ann, today, we want to focus mostly on the labor market. While equities were sort of already in this recovery mode, it seems like it was the June employment report that really got us over the hump. So what was it about that particular report that caused such an optimistic shift in market sentiment?

LIZ ANN: I think, number one, it was the strength of the report, which was much better than expectations. But I think it reinforced, in addition to other economic data that we’ve gotten, which showed that the economy is doing fairly well, it reinforced the idea that May did not signal that we were heading into a recession, that that was an aberration, to some degree, that was driven by the Verizon strike. So I think that was the catalyst we needed to get the market to move out of this range it’s been in.

RANDY: Well, now, I know that the non-farm payroll number was the strongest one we’ve seen since October of 2015, but there are other numbers that come out that sometimes don’t get quite as much news coverage, if you will. And one of those is the U6, or what we call the underemployment rate.

Now, can you discuss this number and why it may help explain why the labor market, or why some people feel like the labor market, isn’t quite as strong as what the headline numbers tell us?

LIZ ANN: And a lot of people do focus on the U6 measure because it looks at part-time workers that want to be working full-time. It looks at people who are dissatisfied with their job, and that is a still fairly high number— it’s about 912, and that’s well above the traditional unemployment rate.

And I don’t want to dismiss the concerns associated with that; we have a lot more to go to move that number down. But I do want to point out that the spread relative to the U3 traditional measure of employment, which is high, has always been high. It’s always been well above.

So what we’re seeing now really isn’t that much different than what we’ve seen in history. So I just do want to point it out that this isn’t uniquely different this time.

RANDY: All right. Well, that makes a lot of sense. Now, along these same lines, there are these other reports that come out at different times of the month that sometimes help us sort of dig a little bit deeper into this.

Can you discuss what’s called the JOLTS Report, and some of the components to that, like the hires and the quits rate, and what does that tell us about the labor market?

LIZ ANN: And part of the reason why we look at them more often is because the Fed is looking at them. So you mentioned JOLTS. JOLTS is an acronym for the Job Opening and Labor Turnover Survey, which has a number of different component parts.

It looks at job openings, which have consistently been high and trending higher. That’s good news. More recently, though, the hiring rate has dropped down a little bit, and that spread, that gap, represents a skills gap. So a lot of the job openings don’t have skilled workers to fill it. So that’s going to increasingly be a theme in this environment.

And then, lastly, good news is the quits rate continues to be high. And that just measures people quitting their job voluntarily, either because they have another job or probably because they feel confident in getting one. And that’s a good sign of underlying health in the jobs market, but also the economy.

RANDY: Well, that definitely seems encouraging. Now, ultimately, one of the reasons we watch all this data, of course, is so that we can try to forecast when the Fed might decide to raise rates again. And one elusive indicator in the labor market that until just recently has been the rise in wages. So what do you see in this particular component, and what impact do you think it will have on Fed policy throughout the remainder of this year?

LIZ ANN: Yes, one interesting thing about wages is the common measure is average hourly earnings, which are running at about a 2.6% year-over-year. But there’s a lot of mix shift stuff that happens in that number—older, more highly-paid workers leaving, younger workers coming in, shift from part-time to full-time.

So the Atlanta Fed Wage Tracker, which is growing in its importance, actually takes all of that out of the mix and just looks at workers who have been employed for a full 12-month period. And you’re seeing about a 3.6% increase in wage growth there. The Fed pays attention to this because increasing wages can ultimately lead to increasing inflation, their other mandate.

And I think the connection between those two is what the Fed pays attention to, and it’s one of the reasons why we think another rate hike this year could still be on the table, and is what we’re building into our expectations.

RANDY: Well, that a makes a lot of sense. Thank you so much, Liz Ann. We’re about out of time. That’s great information.

Listen, if you want to learn more from Liz Ann and read her commentary, you can get that on the Investing Insights section of, and you can always follow her on Twitter @LizAnnSonders, and you can always follow me on Twitter @RandyAFrederick. We will be back again. Until next time, invest wisely. Own your tomorrow.

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