Jobs Report Is a Strong Chain With Weak Links
I don't use the term 'mixed bag' lightly, but the numbers here show some truly good, and truly concerning, signs. Let's dig in.
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I really hate the term "mixed bag."
Economists and analysts use the phrase too often as means to avoid having to take a stand and publicly express a strong opinion. At first glance, Thursday morning's release by the Bureau of Labor Statistics' two labor market surveys for the month of June appears rather strong. The headline numbers all beat expectations. However, after one digs into the numbers, there are soft spots in these releases.
That does not necessarily make June a weak month for labor, but it does take the shine off of the gloss. From a micro perspective, these numbers matter to the individual laborer. From a macro perspective, these numbers matter greatly even if they end up being sharply revised later. That's because this data impacts real-time policy decisions, projections for forward looking policy decisions and of course, financial markets.
Job Creation
As readers are likely well aware, non-farm payrolls are considered by most economists to be the headline number for the monthly BLS release. For June, taking this number from the Establishment Survey (Table B), the BLS reported non-farm payroll growth of 147,000 seasonally adjusted positions, which was above projections for something down around 110,000.
Readers of my Market Recon column know that my model ran above consensus this week. I was at 125,000 coming into the release. This was on top of small upward revisions to the non-farm payrolls estimates that were made to both the April and May reports. April was revised up 11,000 jobs to 158,000 and May was revised up 5,000 jobs to 144,000.
This result is considerably stronger than the increase of 93,000 employed persons reported in the BLS Household Survey (Table A) and much, much stronger than the loss of 33,000 private sector jobs (job destruction) reported on Wednesday in the ADP report. Are any of them truly accurate? That's hard to say. ADP was onto something though, as just short of half (73,000) of that increase in non-farm payrolls were government hires. Service providing jobs fell sharply from 131,000 in April and 141,000 in May to just 68,000 in June. That could potentially mean that a reliable engine for private sector job creation is showing signs of waning.
Key Data
The unemployment rate is drawn from the household survey, which as mentioned above showed an increase of 93,000 employed. This survey also showed a decrease of 222,000 unemployed persons allowing the unemployment rate to drop from 4.2% to 4.1%. Many economists had expected an increase to 4.3%. The deal here is that the number of folks not in the labor force increased by 329,000 persons as 130,000 of those gave up and dropped out of the civilian labor force. Participation dropped from 62.4% to 62.3%, but the employment to population ratio held steady at 59.7%. That ratio stood as high as 60% as recently as April.
Part-time employment stumbled. The number of individuals working part-time for economic reasons decreased by 159,000 and the number working part-time for non-economic reasons decreased by 32,000. With 191,000 part-time jobs lost, the implication taken from the household survey would suggest 284,000 full-time jobs were actually gained. At least that's a positive. The underemployment rate dropped from 7.8% to 7.7%.
While the number of those employed full time increased, average weekly hours worked by those laborers decreased from 34.3 hours to a rather anemic 34.2. That's not a positive as 34.3 was already weak enough, though the number is still up from the truly pathetic 34.1 that printed back in January. That was a post 2010 (great recession) low.
Wage growth was nothing to brag about in this report, either. Average hourly earnings showed month-over-month growth of just 0.2%, down from 0.4% in May and shy of the 0.3% growth that had been expected. On a year over year basis, average hourly earnings printed at growth of 3.7%, down from 3.8% growth in May and well short of the 3.9% that economists had projected.
Demographics
The unemployment rate along gender, ethnic background and education:
- Adult Men... held steady at 3.9%.
- Adult Women... improved from 3.9% to 3.6%.
- Teenagers... increased dramatically from 13.4% to 14.4%.
- White... improved from 3.8 to 3.6%.
- Black or African American... increased sharply from 6.0% to 6.8%.
- Asian... improved from 3.6% to 3.5%.
- Hispanic or Latino... improved sharply from 5.1% to 4.8%.
- High School Dropouts...increased sharply from 5.5% to 5.8%.
- High School Graduates... improved sharply from 4.5% to 4.0%.
- Some College / Associate Degrees... improved from 3.3% to 3.2%.
- Bachelor's Degrees and more... improved from 2.6% to 2.5%.
My Thoughts
Like I mentioned above: This is a true mixed bag. The immediate equity market reaction was to the upside. Treasury yields moved to the upside though, which implies that bond traders or at least the algorithms that replaced bond traders see this report as positive for economic growth. That said, I am not thrilled that such a high percentage of the supposed job creation came from government hires. Those people are employed, but that is not part of the organic U.S. economy and does not reflect economic strength.
The number of folks leaving the labor force contrasts with the numbers of part-time workers finding full-time jobs. That said, both the demand for hours worked by employers and wage growth are slowing. These cannot be considered positives for growth. The bright side might be that these numbers are likely deflationary in nature.
Demographically, I am concerned. I might even be alarmed. How can there be such an improvement in the unemployment rate for adult women with no movement for men? How can the unemployment rate just soar for ethnic Blacks and African Americans, but not for other groups or even other minority groups? Interestingly, for the first time in a while, it does appear that education level achieved did matter in June. Conditions improved for high school graduates, those with some college and those with at least a bachelor's degree, all at the expense of high school dropouts and teenagers.
On Policy...
June was not a weak month for labor, but no honest economist would call this strong. Certain groups have held their ground as others have fallen further behind, which is troubling. Especially since these groups that are now struggling appeared to be making legit progress as recently as May. Layoffs are not rampant. Not even close. It does appear however, that perhaps private sector hiring is getting close to hitting a wall and that lateral movement across the spectrum of labor supply may be getting more difficult.
Going into this release, Fed Funds Futures were pricing in just a 25% probability for a first rate cut on July 30, a 95% probability for that first quarter-point rate cut on Sept. 17 and a 60% probability for three-quarter points worth of rate cuts by year's end.
Almost two hours after that report was released, the probability for a rate cut on July 30 has dropped from 25% to just 7%. The likelihood for a first rate cut on Sept. 17 has dropped from 95% to just 72%, which is still a majority probability. On top of that, this market is now only pricing in a half-point worth of rate cuts by year's end, down from three-quarters of a point. The probability for that third 25-basis point rate cut this year has dropped from 60% to 33%.
Equities are rallying though, as if these probabilities had moved in the other direction. Or... somebody somewhere was concerned about a potential recession and this report eased those concerns.
At the time of publication, Guilfoyle have no position in any security mentioned.
