July Jobs Report
The economy added 255,000 new jobs last month. The unemployment rate steady at 4.9%. We’ll dig into the details.
Financial Review by Sinclair Noe for 08-05-2016
DOW + 191 = 18,543
SPX + 18 = 5182
NAS + 54 = 5221
10 Y + .07 = 1.57
OIL – .02 = 41.91
GOLD – 23.70 = 1337.70
Today’s Jobs Report showed the economy added 255,000 jobs in July. The unemployment rate held steady at 4.9%. The results easily beat estimates of 180,000. Employment gains for June and May, meanwhile, were revised up by a combined 18,000. The government said 292,000 new jobs were created in June instead of 287,000. May’s gain was raised to 24,000 from 11,000. The 3-month average is now 190,000, which is much higher than previously anticipated. Over the last six months, the economy has added an average of 189,000 jobs a month. In July, the year-over-year change was 2.45 million jobs. A monthly gain of 75,000 to 100,000 jobs is sufficient to keep the unemployment rate steady, while a 125,000 monthly gain is what is required to nudge it down further. The economy has added jobs for 76 consecutive months. While a maturing labor market will translate into lower job creation over the next twelve months, reduced labor market slack should provide an offset through stronger wage growth. So, a gain of 255,000 is a very good, very solid report.
The unemployment rate was unchanged at 4.9% as more than 400,000 people joined the labor force in search of work in July, a sign they think more jobs are available. Job openings remain near a record high. The number of unemployed persons was essentially unchanged at 7.8 million. In July, the number of persons unemployed less than 5 weeks decreased by 258,000. At 2.0 million, the number of long-term unemployed (those jobless for 27 weeks or more) was about unchanged over the month and accounted for 26.6 percent of the unemployed.
The resilience of the labor market was reflected in wages and how many hours people work each week. Hourly pay rose 0.3% to $25.69, keeping the 12-month increase in wages at a post-recession high of 2.6%. Inflation is tame, so workers are seeing some modest gains in wages. The average workweek rose 0.1 hour to 34.5 hours, just a tick below an eight-year high.
Every major industry hired in July except for mining and energy companies, which cut 6,000 jobs because of lower oil prices. Business and professional firms led the way, adding 70,000 jobs. Heath care providers hired 43,000 new workers, and restaurants and hotels added 45,000. Manufacturing, construction, transportation, retail trades, wholesale trades, and utilities sectors all added less than 15,000 jobs each – basically unchanged from June. Temporary-help jobs, a harbinger of future hiring, increased 17,000. Government added 38,000 new jobs; and this is something different; the recovery has happened without government adding jobs. In fact we have lost government jobs since 2008. So this should provide a little added boost to the labor market.
An alternate measure of unemployment, called the U-6, increased to 9.7%, up from 9.6% in June, but is down from 10.4% a year ago. The U-6 includes underutilized workers or workers employed part-time for economic reasons. Also, the number of both long term unemployed and part time workers increased slightly. In July, 2.0 million persons were marginally attached to the labor force, about unchanged from a year earlier. There are many reasons why someone might be considered marginally attached. Not all part-timers are necessarily seeking full-time work, however working mothers, returnees to school and older workers often fall into this category.
The Labor Force Participation Rate increased in July to 62.8%, from 62.7 in June. This is the percentage of the working age population in the labor force. One reason often cited for the low participation rate is demographics; the boomer generation is aging and dropping out of the labor force. At the same time, many boomers have been sneaking back in; the biggest market opportunity for start-ups is older Americans. AARP holds yearly pitch events and even has its own incubator. And according to a recent survey by AARP 34 million Americans served as unpaid caregivers to a loved one 50 years old or older in the previous 12 months. That’s real work but I doubt that much of that activity is included in the Labor Department’s monthly reports.
Good news for less-educated workers: Jobless rate fell to 10-year low of 6.3% for those without high school degree; that’s down a full percentage point and the biggest move since March of 1999, when unemployment stood at 4.2 percent and companies were scrambling to find workers. Still, for workers with at least a bachelor’s degree, the unemployment rate is running about 2.5%. Unemployment among Americans 25 or over with less than a high school diploma fell by 118,000, to a total of 669,000, the lowest level since records began in 1992.
Also remember that we have seen 29 states and several cities that have increased minimum wages, plus increases in the lowest-tier salaries by big employers like Walmart, Target and Aetna, are also beginning to ripple through the broader work force. This week, Minnesota raised its minimum wage by 50 cents, requiring large employers to pay workers $9.50 an hour, while smaller firms must pay at least $7.75. On July 1, similar increases went into effect in Maryland, Oregon and the District of Columbia. And there was concern that it might result in fewer low-end jobs. It’s still too early to be definitive but that does not seem to be the case; rather, higher minimum wages seem to be drawing workers from off the sidelines. We’re seeing new entrants into the labor market, which implies a longer runway for the business cycle. And it’s not just low-end jobs. Young adults coming out of college are getting hired, and we’re seeing a lot of activity in the $50,000 to $150,000 category.
Stocks opened higher after the release of the Jobs Report, the Nasdaq composite ended up 1.1% to 5221.12, topping its record close of 5218.86, set more than a year ago, July 20, 2015. The S&P 500 stock index closed at 2182.87. That’s a few points above its all-time closing high of 2175.03, set July 22. Treasury prices tumbled, pushing yields higher. The combination of strong hiring and rising wages gives new life to the argument that the recovery is strengthening, not faltering, as it enters its eighth year. While this was a second consecutive strong jobs report, the markets are acting like it probably won’t be enough to move the needle for the Fed. The May jobs report came in at a very weak 24,000, the June report came in at a very strong 292,000; those numbers clearly had some statistical noise, but the 3-month average is 190,000, which is very solid. For those policy makers in the “wait and see” camp, poor GDP growth (1.2% in the second quarter) and weak inflation provide enough justification for waiting at least until December for the next rate hike. Still, the Atlanta Fed just upped their GDP target for the third quarter to 3.7% up from their previous expectation of 3.6%. The chances of a rate hike doubled to 18 percent for September after the jobs report and rose to 40 percent from 29 percent for December, according to CME Group’s FedWatch tool; that still means the markets are saying there is a greater chance of no hike than a hike.
We know that the monthly Jobs Report is very important to the Federal Reserve; it is one of the Fed’s two mandates. However, the Jobs Report takes on added importance every four years. We are now about 3 months away from the presidential election. The United States economy is creating jobs at a rapid pace; most people who say they want a job are able to find one, and employers are having a hard enough time finding workers that they’re having to pay higher wages. Higher wages should result in more consumer spending, which should lift the economy in the second half of the year. There are still plenty of things that can go wrong with the economy and the financial markets over the next 3 months. But if we get 3 more strong jobs reports, it will have a strong impact on the elections. Political science research particularly points to changes in income as being predictors of how people vote, and the July data on average hourly earnings suggest American workers are being paid more: a 2.6 percent gain over the last year, tied for the highest since 2009 and a comfortable gain in workers’ purchasing power in an era of low inflation.
It’s the old question – are you better off now than you were 8 years ago? Eight years ago, we were looking at the possibility of a global financial meltdown and the economy was hemorrhaging 800,000 jobs per month. So, you can expect the issue of jobs to be a very relevant part of the political discussion in the next few months. The reality is that we have seen 76 consecutive months of job growth, we are seeing steady but not exploding growth, very close to full employment, low inflation, low inflation rates, strong but not exploding existing and new home sales, strong auto sales even if softening from the previous record two years, steady but not exploding wage growth, strong equity markets, and no sign of overheating, even as the S&P 500 hits a record high. True, there are many people who have not participated fully in the jobs recovery, and the recovery has been slow and sluggish. There are parts of the economy that are struggling, and there are constant risks that could explode in an instant; there are still very real and persistent problems in the economy, and we can always do better and therefore we should never be satisfied, but the facts are clear that we have seen a recovery.