Employment Situation

The employment report shows signs of an improved employment situation, but on balance it looks like more of the same. The unemployment rate fell 0.2 points to 8.5%. This continues the recent trend of a falling unemployment rate. But the drop was also driven by anther 50,000 drop in the
labor force.

But the increase in the headline payroll employment was 200,000, one of the largest gains this cycle. The household increase in employment eased to some 176,000, significantly smaller than over the past few months when the household survey showed well over 200,000 monthly job

In particular, private payrolls showed a nice improvement over the past few months.

Maybe most importantly, the index of aggregate hours worked looks like it is continuing the trend
established soon after it bottomed. The year over year gain in hours worked has been bouncing around 2.5% since the first quarter.

Average hourly earnings continue to stagnate around 2%, modestly better than the 1.8% increase in 2010.

It may be possible to say that average weekly earnings growth has bottomed, but to call it a bottom or a trend change look like a stretch to me. With such weak wage gains nominal personal income growth is likely to remain weak and in an environment of such weak income gains it is difficult to see how higher inflation can be sustained.