Introduction

Payroll growth in the June employment report stands as the best economic news so far this year, but the report also includes not so great news on wages which are completely flat. Yet with core inflation not even running at 1.5 percent, better wages may not be that important to the American worker who is simply content to have a job. Details on the low wage, high employment economy follow.

The economy

Job growth resumed in strength during June as nonfarm payrolls jumped 222,000 with revisions to May and April adding another 47,000. Yet the March to May period was still soft and the trend continues to point lower, a fact that will limit forecasts for the next report on July. That employment growth may be limited should be no surprise given that the number of people who want a job keeps shrinking and shrinking, to just below 7 million for those actively pounding the pavement and at 12.4 million overall.

Economics is all about supply and demand, right? When supply is low, like it is right now for labor, and demand is high, like it is now with hiring up and job openings on a tear, then prices go up, yes? Well, no seems to be the answer. Average hourly earnings rose only 0.15 percent in June which is right at what has been a sinking trend line. Wages need to move up to feed overall inflation which, on a monthly basis for the core PCE, is trending below 0.10 percent. Job growth without wage growth spells low paying jobs.

Retail wages, averaging just over $18 per hour, are up only 1.2 percent from this time last year which is less than half the 2.5 percent overall rate. But, as payroll growth nears zero, at least the law of supply and demand appears to be working. And sub-zero scores may even be in store given the flood of retail layoff announcements which were very heavy in Challenger's June count. The wage outlook for retail, a sector that makes up 11 percent of all payrolls, isn't very bullish.

Manufacturing was once known to have high paying jobs. That's old history with pay, now at about $26.50, only 25 cents above the average. And payroll growth has also been slow with this trend also fighting to stay above zero. Backlogs are the bottom line and, despite all the confidence in all the private surveys, they are still under water. Until unfilled orders pile up, gains for factory payrolls and wage will be limited. Despite a big jump in ISM's employment index, actual factory payrolls rose only 1,000 in June.

Construction pay has been rising and is nearing $29 per hour and construction payrolls, up 16,000, are a highlight of the June employment report. Data on construction spending were also released during the week but here the news is less positive. Spending has been flat, held back by Spring weakness in both nonresidential and residential building with permits for the latter  down which is an especially bad signal. For construction payrolls to move higher, construction spending will have to improve.

One of the best paid industries is mining which, since Trump's victory in November and promise of deregulation, is gaining traction and emerging from the 2014 oil collapse. The average hourly wage for mining is about $32.50, more than $6 above average. And mining has been a strength of the industrial production report which will be a highlight of the coming week's calendar. Yet both payrolls and production are tied to commodity prices and with oil back under $45, the outlook here isn't completely certain.

Yet total demand for labor, if not wages, is in fact very strong. Employers are more and more turning to professional service providers including temporary help. These categories are making up an ever rising share of total employment, at 14 percent for professional services and at 2 percent for temporaries. And their share in June's growth was bigger than usual, at 16 percent for services overall and 6 percent for temps. But temps earn less and their rising numbers are not giving wages any lift.

Wages aside, this was a good week for economic news. The jobs report is the first major indication on June and the payroll gains, as well as gains for hours, are positive signals for activity in general. Another positive comes from trade data that show a solid narrowing in the deficit. Leading once again was service exports which, at $64.8 billion, rose 1.0 percent in the month to further exceed service imports. Demand is strong for our technical and managerial services where hourly wages are typically over $30.

Markets: Low inflation, low yields

Low bond yields are attracting the attention of FOMC members who in their semi-annual monetary report warn that bonds holders, apparently not concerned about a bounce in inflation, are content with low yields, possibly exposing them to trouble should inflation expectations begin to rise. But over the past month yields have been moving up, certainly less so on inflation worries and more so on the Fed's intention, firmly outlined at the June FOMC, to begin winding down their support of the bond market later this year.

Stocks had a marginally positive week responding only moderately to the stronger-than-expected payroll growth in Friday's employment report. Of more significance, especially for the inflation outlook, is the lack of strength for oil which fell another 4.2 percent in the week to $44.23 and a 17.7 percent year-to-date loss. Core inflation does exclude oil but weakness here permeates the rest of the economy and has a dampening effect on prices elsewhere, not to mention factory and mining output.

The bottom line

Raising rates and cutting down on bond buying means that the Fed won't be giving much of a boost to inflation in the months ahead. But their preset course to withdraw stimulus could leave policy makers with a sense of doubt if wages and if inflation don't in fact pick up. Americans do have jobs but lack of wage growth also points to trouble for consumer spending, where continued softness could leave further room for doubt.

Week of July 10 to July 14

Janet Yellen's testimony on Wednesday will limit any reaction to data early in the week including job openings in Tuesday's JOLTS report which have been accelerating sharply and underscoring the strength in labor demand. In advance of Yellen's appearance, the Fed released its semi-annual monetary report which confirms the FOMC's intention to begin unwinding its $4.5 trillion balance sheet before year end. Questions on the inflation outlook are certain to be front and center. Inflation data will in fact cap the week with Friday's consumer price report where minimal pressure is the Econoday consensus. And a minimal gain is the expectation for Friday's retail sales report which, once again, is expected to be held down by weak auto sales. Industrial production at midmorning Friday rounds out the week and here too another month of softness is the call for the manufacturing component.

Monday

Labor Market Conditions Index for June

Consensus Forecast: 1.8

Consensus Range: 1.6 to 2.5

The labor market conditions index is running better after upward revisions in the last report where the May headline came in at a still soft but higher-than-expected 3.5. This report tracks wage growth but weakness here is being offset by solid employment growth. Forecasters see the April index coming in at 1.8.

Consumer Credit for May

Consensus Forecast: $14.6 billion

Consensus Range: $12.0 to $16.0 billion

Credit growth slowed in April to $8.2 billion, down from a long steady trend in the $15 to $20 billion range. Forecasters see consumer credit moving back up to trend, at a consensus $14.6 billion in May. The revolving credit component has been soft reflecting reluctance among consumers to run up their credit cards.

Tuesday

Small Business Optimism Index for June

Consensus Forecast: 104.5

Consensus Range: 104.0 to 106.9

The small business optimism index has been holding near expansion highs on strong economic optimism and aggressive plans for capital outlays and hiring. The Econoday consensus for June is 104.5 in what would be unchanged from May.

JOLTS: Job Openings for May

Consensus Forecast: 5.975 million

Consensus Range: 5.900 to 6.100 million

Job openings in the JOLTS report are expected to edge lower to a consensus 5.975 million in May vs a very strong 6.044 million in April. Job openings have been running about 1 million above totals for hiring indicating that employers are having a hard time finding the right people.

Wholesale Inventories for May

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.3%

Wholesale trade inventories are expected to rise a sizable 0.3 percent in May which would match the month's advance estimate. Wholesalers, facing soft sales, kept their inventories in check earlier in the year.

Wednesday

Beige Book

Prepared for the July 25 & 26 FOMC Meeting

Short supply of labor has been the warning all year from the Beige Book though wage pressures have yet to appear and the assessment of the economy remains no better than modest to moderate. The prior Beige Book in May was the most downbeat of any this year, with words like "flattening out" and "slowing" popping up. As far as the July FOMC is concerned, there are no expectations for a rate hike which makes market reaction to the latest Beige Book unlikely.

Thursday

Initial Jobless Claims for July 8 week

Consensus Forecast: 245,000

Consensus Range: 242,000 to 250,000

Demand for labor is very strong reflected in jobless claims which are at historic lows. Forecasters sees initial claims coming in at 245,000 in the July 8 week vs 248,000 in the prior week.

PPI-FD for June

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: -0.1% to 0.1%

PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.2%

PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.2%

Like other inflationary data, producer prices have been soft and were unchanged in May with forecasters calling for the same in June. Prices less food & energy showed some life in May at plus 0.3 percent but with the June consensus at plus 0.2 percent. Less food, energy & trade, prices are also seen up 0.2 percent.

Friday

Consumer Price Index for June

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.2%

Consumer Price Index

Consensus Forecast, Year-on-Year Change: 1.7%

Consensus Range: 1.6% to 1.8%

CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 1.7%

Consensus Range: 1.7% to 1.9%

Econoday's consensus is not calling for strength in consumer prices, at a monthly gain of only 0.1 percent in June vs a 0.1 percent decline in May. The yearly rate is seen falling back to 1.7 percent from 1.9 percent. Less food & energy, the rate is seen rising 0.2 percent vs May's gain of 0.1 percent with this closely watched yearly rate also called at 1.7 percent. Though this report has been tipped lower by declines in cell phone service plans and pharmaceuticals, fundamental costs like housing and medical care have also been slowing.

Retail Sales for June

Consensus Forecast: 0.1%

Consensus Range: 0.0% to 0.4%

Retail Sales Ex-Autos

Consensus Forecast: 0.2%

Consensus Range: 0.1% to 0.4%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.4%

Consensus Range: 0.3% to 0.5%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.5%

Consensus Range: 0.3% to 0.5%

Retail sales need to rebound in June to help second-quarter consumer spending but the Econoday consensus isn't calling for much strength, at a gain of 0.1 percent vs an outright 0.3 percent decline in May. Unit vehicle sales proved flat in May which is not a positive indication for the autos component of this report which has posted 4 monthly declines so far this year. Ex-auto sales also fell 0.3 percent in May and the call for June is plus 0.2 percent. Two other closely watched readings in this report, ex-autos & ex-gas sales and also control group sales, were both unchanged in May with, however, better strength expected for June, at 0.4 percent for the former and 0.5 percent for the latter.

Industrial Production for June

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.5%

Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.2%

Consensus Range: -0.2% to 0.4%

Capacity Utilization Rate

Consensus Forecast: 76.8%

Consensus Range: 76.6% to 76.9%

Forecasters are calling for a 0.3 percent gain in June industrial production in what would be a solid result and well up from May's no change reading. But the manufacturing component, which has been in sizable contraction in 2 of the last 3 reports, is expected to post a more limited gain, at a consensus 0.2 percent. Capacity utilization is expected to firm to 76.8 percent vs May's 76.6 percent.

Business Inventories for May

Consensus Forecast,  Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.3%

Business inventories opened the second quarter with a 0.2 percent decline in April but, in what would be a plus for second-quarter GDP, are expected to rise 0.3 percent in May. A return to inventory expansion would signal a firming in business confidence.

Consumer Sentiment Index, preliminary July

Consensus Forecast: 95.1

Consensus Range: 94.0 to 96.0

The consumer sentiment index fell back in June to the least optimistic reading since the November election, falling 1.6 points to 95.1 with a falloff in expectations offsetting a small gain and another strong reading for current conditions. Not strong at all, however, are inflation expectations which remain dormant.