Thursday Jobs Report
DOW – 27 = 17,730
SPX – 0.64 = 2076
NAS – 3 = 5009
10 YR YLD – .02 = 2.39%
OIL – .03 = 56.93
GOLD – 2.60 = 1166.70
SILV + .13 = 15.78
Normally, we get the jobs report on the first Friday of the month, but the stock and bond markets will be closed tomorrow for the 4th of July holiday; so, it’s a Jobs Report Thursday.
The US economy created 223,000 new jobs in June. The unemployment rate dropped from 5.5% to 5.3%; that’s the lowest level in 7 years. Employment gains for May and April were revised lower by a combined 60,000. Most estimates were calling for 225,000 new jobs last month, so today’s report was right in line. Total employment is now 3.5 million above the previous peak. Total employment is up 12.2 million from the employment recession low. The economy has produced at least 200,000 jobs in 13 of the last 15 months. The economy added 2.9 million jobs in the past 12 months.
The participation rate – the percentage of workers in a job or actively seeking a job – dropped three ticks to 62.6%, as 432,000 people dropped out of the labor pool. And this explains why the unemployment rate dropped to 5.3%, because fewer people were looking for work. Part of the reason may be demographics, as the Boomer generation moves into retirement; so, to get a better indication we can look at the 25-54 age group, which is considered prime years for working – too old for school and too young for retirement; among this age group, the participation rate dropped to 80.8% in June from 81%. This is not a good sign.
The decline in the participation rate is even more disconcerting because June tends to be a month when people move into the labor force; teenagers get summer jobs, recent college grads throw the CVs out on the internet, teachers take work between semesters. In the last decade, an average 1.35 million workers have entered the labor force every June on a not seasonally adjusted basis. This year, the gain was 564,000. That translates into a decline for the seasonally adjusted data, since the monthly increase was much less than it usually is. One theory is that the cold winter weather resulted in snow days, and many students and teachers were still in the classrooms in June. If that is the case, we might see a pop in the July numbers. Or it might be a data glitch, which will be corrected in revisions. Or not. It might just be an indication that there is still way too much slack in the labor force. Unless this trend changes, the shrinkage in the labor force implies that the United States’ economic potential is lower than it would be if there were millions of people ready to jump back into the work force if there were jobs on offer. (And no, I do not know how they count recently announced presidential candidates. Clearly that is a number that could skew results.)
So anyway, the labor force participation rate is at 62.6%, and that is the lowest level since October 1977. It is interesting to look at the changes between the 1977 labor market and today. The biggest difference is in the number of women employed, from 36 million in October 1977 to 54 million now. Male employment has also climbed, but not as much. So as the female labor-force participation rate has climbed, the male rate has dropped, from 80% to 72%. And whereas the male unemployment rate was much lower in 1977, now there’s gender parity. What hasn’t changed is the racial imbalance. The black unemployment rate is about double the white unemployment rate, then and now. The other big change is that in 1977 there were more people working in manufacturing, more than 19 million compared to a little more than 12 million today. Construction is up, a bit; transportation and public utilities have grown the most by percentage. But the big difference is in the service sector, which has exploded from around 15.5 million in October 1977 to almost 62.5 million today.
And that isn’t the only way the labor market has changed in the past 38 years; work has become untethered from the office thanks to the technological revolution; that has led to an explosion in freelance or a more flexible workforce. Imprecise terms like “temp,” “contingent,” and even “freelance” fail to reveal the shift taking place; there is a new category of “on demand” workers. The rise of the on-demand workforce encompasses far more than Lyft, its rival Uber, or similar start-ups like Airbnb, for overnight stays, that allow for new “sharing” sources of income. And it’s hardly a millennial phenomenon, although younger workers do have the highest rates of “freelance” work, and generally hope to keep it that way. It’s possible that “work” is also coming in multiple forms, from multiple sources.
Of self-described freelance workers, 27% have a traditional job and “moonlight,” and another 18% do a mix of full-time and freelance work, whether by choice or necessity. The classification of people as either employees or independent contractors for legal purposes is also not keeping up with reality. And here’s a shocker, the governmental agencies assigned with tracking this workforce, haven’t kept up. The Labor Department’s “Contingent Work Supplement” was designed to track some of the indicators, but they ran out of money in 2005. So, the reality is we just don’t know.
The number of people working part-time for economic reasons decreased from 6.6 million in May to 6.5 million in June. An alternate measure of unemployment known as U-6, which includes underutilized workers, dropped to 10.5%, the lowest level since July 2008.
Most industries added jobs in June, with the notable exception again of energy producers; the mining and logging sector, which includes jobs in the oil fields, lost 3,000 jobs last month; the unemployment rate in the mining and gas industry now hovers around 8.9% – a sharp increase from 2.5% one year ago. White-collar workers in fields like finance, insurance, software and marketing have been in high demand lately, a turnaround from the early days of the recovery when many new jobs tended to be in low-wage sectors like retailing and restaurants. Professional and business services added 64,000 jobs last month; since last summer, for example, the financial sector has added more than 100,000 new positions; the banking and finance industry now boasts the lowest unemployment rate, 2.5%, of any industry tracked by the Bureau of Labor Statistics.
Taking a look at other industries: education and health services added 50,000 jobs, retail added 33,000, leisure and hospitality gained 22,000, financial activities 20,000, transportation gained 17,000, information added 7,000, and manufacturing added 4,000. Utilities lost a few hundred jobs and mining down 3,000. Government jobs both at the federal level and the state and local level were flat.
Retailers hired 33,000 people in June after taking on 26,000 new workers in May. Over the past year the industry has filled some 300,000 positions to boost overall employment to a record 15.7 million. Retailers are hiring like they expect sales to pick up, even though we haven’t seen an indication that sales are actually picking up. And that goes in line with another economic report this morning showing orders for goods produced in U.S. factories fell 1% in May. Orders for durable goods, products meant to last at least three years, fell 2.2%, compared with a prior estimate of a 1.8% drop. Meanwhile, orders for nondurable goods increased 0.2%. Last week the Commerce Department reported consumer purchases rose 0.9 percent in May, the biggest gain since August 2009
Average hourly earnings for all employees on private nonfarm payrolls were unchanged at $24.95. Weekly hours were unchanged for the fourth month in a row, at 34.5. Over the year, average hourly earnings have risen by 2.0 percent. Any increase is good, but the pace is discouraging because it’s still far below the 3% to 4% wage gains that were common in the mid- to late-1990s.Every month for the past 3 years the economy has added at least 100,000 new jobs, but wage growth shows no pulse, no signs of life. This would suggest that the unemployment rate could go much lower before we need to worry about wage push inflation.
So, the economy added 223,000 jobs but there was weakness in the participation rate, and wages, and the prior 2 months were revised lower. And that means nothing in today’s jobs report is expected to dramatically change the Federal Reserve’s outlook for the economy or a possible rate hike in September. Still, traders who use fed funds futures contracts cut their expectations of a September move down to 17% and even lowered their expectations of a move by December a bit. The Fed has four policy meetings left this year: July, September, October and December. If you think the Fed will hike rates in September, today’s report probably did not change your outlook. If you think the Fed will wait till December or maybe next year, again, no need to rewrite your thesis.
The Fed seems to think full employment is when the unemployment rate hits about 5% to 5.2%; that’s the most jobs we can have while keeping the inflation genie in the bottle. But when you look at the shrinking participation rate, and weak wages, and underutilized workers, and temps, and part-timers – maybe 4% unemployment rate is closer to full employment. Nobody knows how low unemployment can go before inflation picks up. Everybody, including the Fed, is just guessing. The only thing we do know is that we’re not there now. And that’s why there’s a strong case for the Fed to wait.
Today’s report: 223,000 new jobs in June. The unemployment rate 5.3%. Flat wages, declining participation. Decent, not great.