The rise in the US unemployment rate isn’t bad news

By Eshe NelsonJuly 6, 2018

In June, the US unemployment rate unexpectedly rose to 4% from 3.8% the month before, coming off an 18-year low.

Rather than being an omen of bad things to come, the rise suggests a positive outlook for the US economy as it coincides with more than 600,000 people entering the labor force.

These new entrants to the labor market have good reason to think their prospects of finding a job are good: Job growth is really strong. Last month, US employers added 213,000 jobs, exceeding already high expectations of 195,000. The figures for the previous two months were also revised higher. It’s the 93rd consecutive month of job gains, an impressively long and strong stretch of growth.

That said, the labor market isn’t perfect. Pay increases remain the missing part. Even with more and more jobs, annual wage growth has remained stubbornly below 3% since early 2009. In June, it was 2.7%, staying the same as the previous month, and falling short of economists’ expectations.

The sluggish wage growth is made worse by rising inflation rates eating away at take-home pay. In May, the annual inflation rate rose to 2.8%, exceeding wage gains.

The Federal Reserve won’t have to worry about raising interest rates too quickly as wages aren’t rising enough. But policymakers have something new to worry about: trade. The US-China trade war started in earnest today (July 6) and the Fed has already said there are signs businesses are delaying spending plans (paywall) because of uncertainty.

The Trump administration’s tariffs were supposed to expand employment in the US yet plans like Harley-Davidson’s move to increase jobs abroad shows how quickly his plan is backfiring. Next month, the job reports might show more clearly how executives are reacting to the retaliatory tariffs being launched at the US from China, the EU, Canada, and Mexico.