Financial Review

July Jobs Report

…Economy adds 157,000 jobs in July. Unemployment rate 3.9%. Wages remain stagnant. The skills gap is really the demand gap. Tariffs and the Fed could be stumbling blocks to full employment.

Financial Review by Sinclair Noe for 08-03-2018

DOW + 136 = 25,462
SPX + 13 = 2840
NAS + 9 = 7812
RUT – 8 = 1673
10 Y – .03 = 2.95%
OIL – .38 = 68.58
GOLD + 6.10 = 1214.30


The economy added 157,000 new jobs in July. The unemployment rate dropped to 3.9% from 4%. Most estimates were calling for 190,000 to 200,000 new jobs, so July numbers missed estimates but May and June were revised higher by 59,000. For the first 6 months of the year, average job growth comes in at 224,000 per month, which is very strong. Over the past 12 month, the economy has added 2.4 million jobs.


In July, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $27.05. Over the year, average hourly earnings have increased by 71 cents, or 2.7 percent. And even those increases have been largely eaten up by rising inflation. This far into a jobs recovery, wages should be rising 3% to 4% a year. The dip in the unemployment rate without any corresponding upward pressure on wages suggested more slack in the labor market than the unemployment rate might otherwise suggest.


White-collar professional firms added 51,000 jobs last month, continuing a strong run of employment gains. Health-care providers hired 34,000 people. And bars and restaurants beefed up staff by 26,000. Construction companies added an additional 19,000 workers despite a nationwide shortage of labor. Builders say it’s increasingly hard to find experienced carpenters, framers, concrete pourers and the like. The manufacturing sector has been strong recently and gained another 37,000 jobs in July. Makers of machinery, fabricated metals and electrical equipment have been among the most aggressive in hiring. And manufacturing jobs haven’t really been impacted yet by tariffs. The financial industry and government were the only industries to trim employment. Banks and insurers cut 5,000 jobs and government jobs declined by 13,000. Most of those were in education and could prove to be temporary.


In Obama’s last 16 months in office, the number of jobs in the US increased by 2.4%. In the first 16 months of Trump’s administration, jobs rose by 2.1%, according to the Bureau of Labor Statistics. The strong labor market under Obama turned into a strong labor market under Trump as healthcare and education continued to boom.


When you look closer, a lot has changed for certain industries. Under Trump, the situation for certain mining and manufacturing industries has greatly improved. Work in the category “Support activities for mining”—which includes jobs exploring mining sites—grew by almost 28% under Trump, compared to losses of about 23% in the last 16 months of Obama. It is not clear how much Trump’s policies have led to the increase in manufacturing and for miners’ brighter prospects. Jobs in these industries are cyclical, and also grew at times under Obama. Yet it seems likely that in the short-term, Trump’s emphasis on deregulation has sparked some growth, though the long-term consequences for the environment and US economy could be quite bad.


The Labor Force Participation Rate was unchanged in July at 62.9%. This is the percentage of the working age population in the labor force.

There are several different ways to measure unemployment. The headline unemployment rate of 3.9% is known as U-3. An alternate measure, known as U-6, includes unemployed plus under-utilized workers, or people working part-time who would like full-time jobs. The U-6 rate declined to 7.5%, the lowest level since 2001. Still, that represents about 4.6 million workers. There are also more than 1.4 million workers who have been unemployed more than 26 weeks, or more than half a year. This indicates there is slack in the labor force. But we hear that there is now a job opening for every one of these people; the number of available jobs matches or exceeds the number of people who want a job.


It has become common to cite the rise in the ratio of job openings to hires as evidence that employers can’t find people with the necessary skills. This then leads to an argument that our problem is not a lack of jobs in the economy, but rather that workers don’t have the skills that are in demand in today’s economy. We then tell workers that they need more skills, which might not really be the case. One of the sectors with the sharpest rise in openings to hires is the restaurant sector, but this is not an industry that is generally thought to demand highly skilled workers. No disrespect – I realize that some restaurant workers are indeed very highly skilled and the jobs are quite demanding. Anyhow, recent data from the Job Openings and Labor Turnover Survey (JOLTS) indicate that restaurants are finding it even harder now to find workers with the necessary skills. It is doubtful that the dexterity and prowess required to sling hash hasn’t changed much over the years, and I imagine many people possess the capability to serve up a hot plate – but they are not willing to do it for the wages being offered. And the restauranteurs are working in a highly competitive marketplace, often with thin margins and little room to offer higher compensation without a significant jump in final demand. It seems the real problem is not a skills gap, but a demand gap.


Right now, the economy is strong; demand has been increasing, not enough to raise wages significantly but enough to warrant overlooking the skills gap. The unemployment rate for workers without a high school degree fell to 5.1 percent in July, the lowest rate since the Bureau of Labor Statistics adjusted its education measures in 1992. This is 1.9 percentage points below its year-ago rate. Less educated workers have been the big gainers in terms of employment in the last few years of the recovery. While the unemployment rate for workers with less than a high school degree is well below the prerecession level and even its 2000 low, the unemployment rate for workers with a college degree, at 2.2 percent, is still above its prerecession low of 1.8 percent and well above its 2000 low of 1.5 percent. Workers with only a high school degree also seem to be doing relatively better, with a 4.0 percent unemployment rate matching the prerecession low (it had been 3.9 percent in May), although still above the 3.2 percent low hit in 1999. The idea that the labor market is becoming increasingly tilted to favor more educated workers does not appear to be supported by the employment data.


Quite simply, in many instances, employers are unwilling to pay more wages, even if that means they have to settle for less-skilled workers. As the less-skilled workers are pulled from the sidelines and tossed into the game, we see less slack in the labor force, but we are not yet at full employment, and we know this because wages have not jumped. If we continue on the current path, there will come a time when wages pop, but we are not there yet, and there is still plenty that could derail the recovery in the labor market – specifically trade wars and the Fed.


Today, China had a swift reaction to Trump’s plans to double down on failing tariffs—Beijing said it would add more taxes to $60 billion in US goods. China’s Ministry of Finance said Trump’s proposal to increase US tariffs on Chinese goods from 10% to 25% this week is a “serious violation” of World Trade Organization rules and damages Chinese national interests. It’s the latest escalation in what has become the trade war between the world’s two biggest economies.


Nearly 2,500 US products will be taxed at 25%. Beijing said that list includes cocoa butter, tequila, zippers, wine, leather, laundry soap, paper bags, crystal goblets, and liquified natural gas. Another 1,078 products will be taxed at 20% including thermoses, chewing gum, antiques and toothbrushes. Nearly 1,000 products will be taxed at 10%, including sandpaper, optical cables, and peanut butter. And over 650 products will be taxed at 5%, including formaldehyde, tractor parts, and speedometers. Beijing and Washington imposed matching tariffs last month on $34 billion apiece of each others products, and have plans to add another $16 billion worth of goods to their lists.


Beijing doesn’t really have the option of responding dollar for dollar because China simply does not buy that much from the United States. China sells goods each year to the United States worth nearly four times as much as it buys. But Chinese officials have suggested in recent weeks that if the United States proceeds with tariffs on a very wide range of Chinese goods, then Beijing will respond in other ways – I’m watching for currency devaluation. Wall Street has focused on earnings reports and been willing to overlook trade concerns – that could change fast.


The Federal Reserve upgraded its view of the economy this week, substituting “strong” for “solid” in the statement that policymakers released after their latest meeting. The consensus on Wall Street calls for the central bank to raise rates twice more this year, in September and December. Today’s jobs report confirms that trajectory, which would bring the benchmark rate to 2.25 to 2.5 percent by the end of the year. Although even that level is low by historical standards, the Fed’s slow but steady campaign to normalize interest rates after years near the zero bound is beginning to be felt. Home buyers are encountering higher mortgage rates, one reason that the housing market has been faltering lately even as other economic indicators like hiring have remained strong, as evidenced by the upward revisions for May and June.

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