No worries over rate hikes as US jobs hit 'Goldilocks' growth zone

By beating headline market expectations in a big way, the employment report for last month, released on Friday, provides a reassuring assessment of the US labour market and, more generally, the well-being of consumers. It was encouraging that the labour participation rate ticked up after a steep two-month decline that took it close to multidecade […]

By beating headline market expectations in a big way, the employment report for last month, released on Friday, provides a reassuring assessment of the US labour market and, more generally, the well-being of consumers. It was encouraging that the labour participation rate ticked up after a steep two-month decline that took it close to multidecade lows. Unfortunately, wage growth remained below what is needed to underpin a more buoyant economic outlook.

After a surprisingly weak 38,000 jobs were added in May, the US economy created 287,000 last month. This figure provides a solid signal that the poor performance for May was likely to have been an outlier. The small increase in the labour participation rate to 62.7 per cent last month – especially after the sharp 0.4 percentage point drop in the previous two months – also was encouraging. But a third indicator, wage growth, remained sluggish, with only a 0.1 per cent monthly increase (or 2.6 per cent year-on-year).

To create the conditions for brighter prospects for growth, prosperity and income distribution, the US economy will need continued solid job creation (say, average monthly growth of 125,000 to 150,000) and a gradually higher participation rate (an increase of 0.1 to 0.2 percentage points per month on average), accompanied by stronger wage growth that approaches 3 per cent year-on-year.

Viewed as a whole, last month’s jobs report is stronger than financial markets had expected.

The report will be welcomed by equity investors as a “Goldilocks” reading: strong enough to underpin more comforting growth expectations but not too hot to result in an immediate interest rate hike by the Fed. It will be especially welcome to wounded segments of the financial markets – in particular, banking, which had started to raise concerns about systemic risks for Europe and, potentially, the global economy. But the relief will prove transitory if June’s labour-market strength is not reinforced in the months ahead.

Sustainable growth will take root only if the prolonged and excessive reliance on central banks is replaced by a more comprehensive and sustainable policy response that addresses lagging structural reforms, deficient aggregate demand, persistent excessive indebtedness and weak regional economic architecture along with insufficient global policy coordination.

For that to happen, the world needs a political environment that is far more coherent and responsive. More than ever, political will and vision will matter more than economic engineering.

Mohamed El Erian is the chief economic adviser at Allianz.

business@thenational.ae

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Source: Business

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