Financial Review

Decent August Jobs Report

Jobs report Friday. The economy added 151,000 job. The unemployment rate holds at 4.9%.

Financial Review by Sinclair Noe for 09-02-2016

DOW + 72 = 18,491
SPX + 9 = 2179
NAS + 22 = 5249
10 Y + .03 = 1.60%
OIL + 1.34 = 45.09
GOLD + 11.20 = 1325.80

The economy added 151,000 jobs last month. The unemployment rate was unchanged at 4.9%. Hiring was expected to taper off after strong gains in July and June in which more than a half-million new jobs were created. The results missed estimates of 180,000 new jobs. Revisions subtracted a net 1,000 jobs from overall payrolls in the previous two months. The government said 275,000 new jobs were created in July instead of 255,000. But June’s gain was cut to 271,000 from 292,000.


The government’s underemployment rate, or U-6, held at 9.7 percent, as the number of people working part-time for economic reasons rose slightly. Some 6.05 million American employees were in part-time jobs but wanted full-time work, up from 5.94 million in the prior month. The Labor Force Participation Rate was unchanged in August at 62.8%. This is the percentage of the working age population in the labor force.


Average hourly earnings rose 0.1 percent from a month earlier to $25.73, following a 0.3 percent increase in the prior month. The year-over-year increase was 2.4 percent, compared with 2.7 percent in the 12 months through July. The average work week for all workers decreased by 6 minutes to 34.3 hours in July, the lowest since 2014 and the first drop in six months. If the jobs market were overheating, you would expect to see longer hours, not fewer. When you combine the shorter workweek with the very small hourly wage gain, average weekly earnings actually fell in August, dropping 0.2 percent to $882.54.


We have now seen job growth for 71 consecutive months. Private employers have added 15.1 million jobs to their payrolls in the 78 months since February 2010, an average of 194,000 jobs a month. Total employment (private plus government) has averaged 191,000 a month over that period, as federal, state, and especially local government were net job losers. That’s right, over the past 6 years, we have lost government jobs. In August, private employers added 126,000 jobs. Federal government employment increased by 1,000, state government employment was unchanged, and local government employment rose by 24,000.


Factories cut payrolls by 14,000, the most in three months. Mining and logging, which includes the oil patch, lost another 4,000 jobs. Employment at construction companies fell for the fourth time in the last five months; down 6,000 in August. Construction firms complain about a lack of skilled construction workers, but it may also portend a slowdown. If builders have orders, they tend to find the workers.


Employment slowed at private service providers, with payrolls in professional and business services adding 22,000 jobs, but that’s the smallest gain since a decrease in January. Retail jobs rose by 15,100. Leisure and Hospitality added 29,000. Education and health services added 39,000.


While equities advanced across the board, the S&P 500 Index remained squarely within the same 1.5 percent band it has now occupied for 37 straight days. That’s the tightest since 1964 for the gauge, with volatility hovering near a two-year low. Things were no different in the currency and bond markets, where benchmark 10-year notes got stuck in the narrowest trading range in almost a decade in August. Yields on two-year notes, the coupon securities most sensitive to Fed policy, were little changed. The 10-year note dropped, pushing yields back above 1.6%; that selloff gave a boost to the banks, especially the regionals. The dollar fell against the world’s major currencies; with a weaker dollar, gold was higher. And the gold miners (GDX) had a great day with a 1.9% pop.  GDX had dropped from $31.79 on August 12 to $25.17 yesterday, so maybe it was due for a bounce or maybe it’s just a dead cat bounce.


Oil rallied. In addition to a weaker dollar, oil halted four days of declines as Vladimir Putin said he would like Russia and OPEC to clinch a deal to freeze supply. The Russian president said he would likely give his backing to a plan to crimp production at the Group of 20 summit in China next week, ahead of OPEC talks in Algiers at the end of September. In the prior 4 sessions, oil lost just over 9%, so even with today’s gains, oil is down a little over 6% for the week.


So, the Jobs Report wasn’t great but not really bad. The economy only needs a little over 100,000 new jobs per month to maintain current levels. If we had seen a repeat of July’s report (275,000 new jobs), we would all be talking about how the job market was overheated. Instead, we have slow, steady growth. The average growth over the past 3 months is still 232,000. In August, the year-over-year change was 2.45 million jobs; that is a very good, steady rate of growth, much better than expected at this point in the recovery.
Was it enough for the Federal Reserve to hike interest rates in September? The unemployment rate has been in a tight range between 4.7% and 5.1% for the past 12 months. No change last month. The economy is close to full employment but we aren’t seeing inflationary pressures as a result.


Fed rate hike odds are essentially unchanged. Fed funds futures imply a 30% chance of a September rate hike, down from 34% yesterday. But December is holding steady at 60%. We know that Fed Chair Janet Yellen said at Jackson Hole that 190,000 jobs would be a clear sign of a very strong labor market, and likely reason for a rate hike.


On Aug. 30, 2016, Fed Vice Chairman Stanley Fischer said the US is “very near full employment.” He added that an interest rate hike (or a series of them) would be made based on economic signs. FOMC members keep citing the current U.S. unemployment rate (U-3) of 4.9% as evidence that the US economy has recovered from the Great Recession. Fischer says the US is near full employment. Even  though the U6 unemployment still seems to have some slack. As of August 2016, it was at 9.7%. In December 2006, the U6 hit a low of approximately 7.9%. In October 2000, the U6 was at a much lower low of 6.8%. The U6 includes the U3 plus discouraged job seekers and those working less than full time because they have not been able to find full-time employment. It seems the data is not quite confirming the full employment argument – close, but not quite.


Richmond Federal Reserve Bank President Jeffrey Lacker said today, after the jobs report that the economy appears strong enough to warrant significantly higher interest rates. Lacker argued that a range of economic analysis suggests the Fed’s benchmark overnight interest rate is too low.


Meanwhile, the last time we saw the Fed hike interest rates in an election year was 2004, and that was part of an ongoing campaign of incremental, very widely anticipated quarter point moves. If the Fed hikes rates in September, it would be a surprise to the market, despite some recent, not-quite-convincing jawboning by policymakers. If the Fed wants to raise rates in September, they need to say it strong and loud – otherwise, we’ll wait for December, which is a long way away.


I read several headlines that called today’s report disappointing, or a “whiff”. Not at all. It just wasn’t as strong as June and July. August was still a good solid month of job growth. We’ve really only had one month this year that was really bad – that was in May, when we added just 24,000 jobs, which proved to be a blip. The labor market still has problems.  More than 6 million Americans are working part-time because they can’t find full-time jobs, a number that has barely budged so far this year. Long-term unemployment remains a problem. Millions of Americans abandoned the labor force during the recession and are now returning at a trickle; the number of jobs increase, but the number of people coming off the sidelines and looking for jobs increased as well – that’s why the unemployment rate stayed steady at 4.9% instead of dropping. The trend lines, however, are headed in the right direction – and one month of just decent job growth doesn’t change that.


We had some other economic data this morning:

The U.S. trade deficit slid almost 12% in July to $39.5 billion as a surge in soybean shipments pushed exports to a 10-month high. Exports rose 1.9% to $186.3 billion to mark the biggest advance in two and a half years. Soybean exports tripled to $5.2 billion, largely accounting for the increase. Imports, on the other hand, fell 0.8% in July to a seasonally adjusted $225.8 billion, even though the price of oil rose for the fifth straight month and hit the highest level per barrel since last September.


The Commerce Department says new orders for manufactured goods rebounded 1.9 percent in July after a downwardly revised 1.8 percent decrease in June. It was the biggest rise since October 2015 and followed two straight months of declines. Orders for non-defense capital goods excluding aircraft increased 1.5 percent in July. Manufacturing, which accounts for about 12 percent of the economy, remains constrained by the lingering effects of a strong dollar and weak global demand, which have crimped exports of factory goods.


Hurricane Hermine made landfall on Florida’s northwest coast early this morning, toppling trees and utility lines, cutting power to tens of thousands and leaving at least one person dead. The Category 1 hurricane moved ashore from the Gulf of Mexico near St. Marks, south of Tallahassee, with sustained winds of 80 miles per hour. It was downgraded to a tropical storm as it churned slowly toward the Carolinas.




Employment chart since 2010

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