Fed’s LMCI continues to advance in July

The Federal Reserve's Labor Market Conditions Index (LMCI) rose 1.1 points in July, the third consecutive monthly increase for the index and a reflection of sustained and broad based labor market improvement early in Q3. The June index reading was also revised higher to +1.4 points from the initial estimate of 0.8. 

Nonfarm payrolls grew by 215k and the U3 unemployment rate was unchanged at 5.3%. As of July, the Fed's measure has made up almost 90% of the 2008-2009 deterioration in labor market conditions; the index has now risen a cumulative 324 points through the expansion, versus the 367 point contraction from January 2008 through June 2009. 

"At an average monthly improvement of about 3 points per month, the index is on track to fully recoup labor market losses in the next 10 months. Historically, the LMCI has continued to improve through the beginning of Fed tightening cycles. Labor markets are expected to behave similarly this time around, and on balance read the July LMCI gain as supportive for the expectation of an initial rate hike at the FOMC's September meeting", says Barclays.

The LMCI uses a dynamic factor model of 19 labor market indicators to extract a single index variable, which is one of the metrics the FOMC uses to assess overall labor market conditions. The release data include only monthly changes in the index, thus, changes are used in the index over the business cycle to understand where labor markets stand.