Financial Review

August Jobs, meh.

….Non-farm payrolls up 156,000. Unemployment rate up to 4.4%. Wages up 0.1%. Some statistical noise, some weakness.

Financial Review by Sinclair Noe for 09-01-2017

 

DOW + 39 = 21,987
SPX + 4 = 2476
NAS + 6 = 6435
RUT + 8 = 1413
10 Y + .04 = 2.16
OIL + .12 = 47.35
GOLD + 3.60 = 1325.40

 

The economy added 156,000 jobs in August, missing expectations for around 180,000. The unemployment rate rose a tick to 4.4% from 4.3%; last month’s rate was a 16-year low.

 

The government cut its estimate of new jobs created in July to 189,000 from 209,000. June’s gain was trimmed to 210,000 from 231,000. A net loss of 41,000 jobs in the revisions. The US have averaged 185,000 new jobs a month since June — more than twice as many as needed to put all the new people entering the labor force each month to work. August marked the 83rd straight month of U.S. job growth, the longest such streak on record.

 

The data mark the seventh straight August that the government’s initial payrolls print has missed the median estimate of economists; the figure has been revised upward in five of the past six years. The trend may be explained in part by a seasonal adjustment process for the new school year. For one thing, August is the second most popular month for vacations. As a result, businesses are slower to respond to the government’s survey on how many workers they employed or hired. True to form the initial response rate last month was 70%, marking the lowest of 2017. By contrast, the average rate of response from January through July was 76.5%. Government employment reportedly fell by 9,000 last month but many economists are skeptical. Labor Department bean counters try to adjust for seasonal swings in educational employment in August and September but they often miss the mark. Not surprisingly, the preliminary estimate for August has undercounted the number of new jobs by an average of 50,000 a year. So, even though today’s report was bad, it wasn’t anything to get bent out of shape about. Not yet anyway – let’s see how the revisions go.

 

The report may represent the cleanest reading on the labor market for several months, as Hurricane Harvey’s fallout in the Houston region begins to affect the data in coming weeks. While the storm may depress payrolls at first, jobs will probably get a subsequent boost as construction and utility workers help rebuild housing and infrastructure. The Labor Department data are based on surveys that reflect payrolls and Americans’ work status for the week that includes the 12th of the month. Harvey made landfall on Aug. 25. So, we can expect a negative impact to the September report.

 

Yet even after the creation of millions of new jobs during the current recovery and the lowest unemployment rate in a decade and a half, worker wages still aren’t rising all that rapidly. Pay rose 0.1% in August to an average of $26.39 an hour. Wages have risen 2.5% in the past 12 months, unchanged from July. Pay usually rises 3% to 4% a year at this stage of an economic recovery, but a slew of factors including global competition and the retirement of higher-paid baby boomers may be holding wages back. Average workweek for all workers fell to 34.4 hours from 34.5 hours (forecast was 34.5 hours).

 

A so-called hidden reserve of unemployed Americans may also be keeping wages down. A broader measure of joblessness, the U-6, or underemployment rate, was 8.6 percent for a third month; U-6 includes part-time workers who’d prefer a full-time position and people who want a job but aren’t actively looking. Employees working part-time for economic reasons fell by 27,000 to 5.26 million. was flat at 8.6%, but the U-6 rate hovered below 8% shortly before the 2007-2009 recession. More Americans who’ve been out of work for long periods are rejoining the labor force in light of a near record number of job openings.

 

Private employment increased by 165,000 (forecast was 172,000) after a 202,000 advance; government payrolls fell by 9,000. In August, manufacturers, construction firms and health care providers account for more than half of all the hiring. Manufacturing added 38,000 jobs. Construction jobs rose by 28,000, the most since February; retail hiring was up 800, the first increase since January; leisure and hospitality was up 4,000 following a 58,000 gain. Professional and business services added 40,000. Financial Activities added 10,000. Transportation added just under 2,000.

 

Manufacturing was a shining star in today’s report, posting one of the best months in a long time. The average workweek for production workers increased by a tenth of an hour to 42.1 hours, while average overtime also increased by a tenth to 4.4 hours. Aggregate number of hours worked by production workers jumped by 0.7%, the most in three years. Hiring was particularly strong in the motor-vehicle sector, where employment rose by 13,700 on a seasonally adjusted basis, the most since February 2014.

 

August is always the strongest month for hiring in autos, as the plants resume full-scale production after a summer lull for retooling. On a not-seasonally adjusted basis, hiring in autos was 30,000 in August, the best since 2013. All this is great news for a beaten-down manufacturing sector. The Institute for Supply Management’s manufacturing index surged to a six-year high in August at 58.8%. The employment index also hit a six-year high. Maybe we are starting to see an upturn in manufacturing, or maybe we are seeing some statistical noise. Give it a month or two.

 

Last month, when the jobs number came in at 209,000 (revised lower today) and the unemployment rate hit a 16-year low, the White House press secretary (I think it was Sean Spicer) claimed White house credit for the strong jobs report. I haven’t heard any announcement from the White House for today’s jobs number. That tells you something about the disappointing number today. What it really tells us is that the White House really isn’t the all-important force behind job growth in the economy, certainly not this early in the administration. At this point, the things the administration has or has not done, have had little impact on the broader economy.

 

There are many ways that political leaders can affect the economy, but right now the federal budget has not changed and won’t for at least another month. Tax and spending policies have not changed from last year, and there are no Trump appointments to the Federal Reserve, so monetary policy has not changed from a political standpoint. Think of the economy as a big ship, a really big ship; it does not turn on a dime.

 

Job growth has averaged 170,000 new positions per month since February, the first full month of the administration. That is below the 208,000 new positions per month in the last six months of 2016. The slower pace of job creation should not be surprising – it is part of the business cycle. With the unemployment rate at 4.4%, employers are somewhat constrained in finding the right candidates to fill open positions.

 

Meanwhile, wage growth was stagnant in the August report, up just 0.1% – this is not normal at this point in the cycle. As the labor market tightens, we would expect wages to increase. We have been expecting wages to increase for over a year. It hasn’t happened. Wages grew 2.5% year-over-year, which is right where it has been for a few years now (give or take a little), but well below normal going back a couple of decades. Millions of workers remain on the sidelines. Many of those workers have just left the market – the retiring baby boom generation is once again having a profound impact on the economy – this time the labor market, but that is not the only factor. The labor force participation rate for 25-54 year old workers dropped by 0.3% to 78.4% – this bit of data represents people in their prime working years. We still have people on the sidelines, or maybe working in the gig economy and not showing up in the official numbers – hard to tell which – but the result is still slack in the labor market.

 

Traders now assume a 30 percent chance of a rate increase when Fed policy makers meet in December, down from a 50 percent chance a few weeks ago. The Fed is set to meet later this month, but is not expected to raise rates. That is not just today’s jobs report but also consider the PCE gauge of inflation which came in at a 1.4% rate in yesterday’s report – well below the Fed’s target of 2%. Given the usual uncertainties that are attached to these monthly numbers, this report should not, in itself, change expectations of an economy that, in the absence of a major policy effort out of Washington, tracks a real growth path of around 2 percent with muted inflation. It will, however, solidify market expectations of a continued dovish Fed, including a lower endpoint for the neutral rate and a longer path to get there, along with a very gradual contraction of the balance sheet. Janet Yellen’s best bet might be to just phone it in until February.

 

One wild card in the second half of 2017 will be gasoline prices. The surge following Hurricane Harvey’s devastation in Texas will leave less money for consumers to spend on other goods and services. On Friday morning, the average price for regular gasoline nationwide was $2.52, a 7-cent increase from Thursday. Prices have risen 15 cents a gallon in the last week, and the current price is 30 cents above the national average for regular gasoline a year ago. Over the course of a year, every penny increase is equivalent to a $1 billion tax on consumers.

 

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