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Friday, August 07, 2015

The July Jobs Report

Financial Review

The July Jobs Report

DOW – 46 = 17,373
SPX – 5 = 2077
NAS – 12 = 5043
10 YR YLD – .06 = 2.17%
OIL – .79 = 43.87
GOLD + 4.30 = 1094.80
SILV + .15 = 14.91

The economy added 215,000 net new jobs in July. The unemployment rate was unchanged at 5.3%, the lowest level in 7 years. The May and June reports were revised slightly higher, employers added 6,000 more jobs in May and 8,000 more in June than previously estimated. The U.S. has added an average of 235,000 jobs a month since May, up sharply from a 195,000 pace in the first quarter. Last year, the economy added 240,000 jobs a month on average between January and July. This year that figure is 178,000.

Most industries added workers, with the notable exception of the mining/logging sector which includes jobs in energy or oil fields, which lost 4,000 jobs. Professional and business services added 40,000, education added 37,000, retailers hired 36,000 people, leisure and hospitality gained 30,000, health-care companies boosted payrolls by 28,000, financial firms tacked on 17,000 workers, transportation and warehousing increased by over 14,000, wholesale trade added more than 6,000, and manufacturers increased employment by 15,000.

Construction added 6,000 jobs, but it is interesting to break out this data. The slump in energy sector investment continues to lead to job loss in the nonresidential construction activity. Outside the energy sector, construction is finding it difficult to find properly credentialed workers. The public sector added 5,000 jobs, while private employers bolstering payrolls by 210,000.

The average hourly wage paid to American workers rose 0.2% in July, or 5 cents to $24.99. Average hourly earnings of private-sector production and non-supervisory employees increased by 3 cents to $21.01 in July. Over the past year wages have risen a mediocre 2.1%, well below long-term averages; closer to 3.6%. The average workweek also grew slightly to 34.6, another sign the economy is maintaining some momentum after a slow start to the year. We have been adding jobs without seeing any significant impact on wage-push inflation.

Total employment is up 12.4 million from the employment recession low. Private employment is up 13.0 million from the recession low. In July, the year-over-year change was just over 2.9 million jobs. And we found an interesting breakout of private sector job growth at broken down by presidential administrations over the past 40 years. Under President Carter’s administration the economy added 9,041,000 private sector jobs. During the Reagan administration, the economy added 14,717,000 jobs. Under the George HW Bush (Bush the senior) administration, we added 1,510,000 jobs. The Clinton administration added 20,955,000 private sector jobs. The George W Bush administration (Bush the junior) posted a net loss of 463,000 private sector jobs. The Obama administration has seen a gain of 8,750,000 private sector jobs, so far.

A big difference between the presidencies has been public sector employment. The public sector grew by more than 1 million jobs under the terms of Carter, Reagan, Bush 41, Clinton, and Bush 43. However the public sector has declined significantly during Obama’s term. These job losses have mostly been at the state and local level, but more recently at the Federal level. This has been a significant drag on overall employment.

Clinton’s two terms were the best for both private and total job creation, followed by Reagan’s second term. Obama’s second term is on track for second best private job creation, but since there were not many government jobs added, it’s only on pace for third best total job creation.

Today’s labor-market report showed that the number of full-time U.S. jobs as a share of total employment rose to 81.7%, the highest level since November 2008. This is good news about the quality of jobs being created. The pool of Americans working part-time for economic reasons fell last month by 180,000 to 6.3 million. That was the lowest level since September 2008. Additionally, the number of people working part-time for non-economic reasons plunged by 589,000, the biggest decline since June 2012.

In July, 1.9 million persons were marginally attached to the labor force, down by 251,000 from a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 668,000 discouraged workers in July, little changed from a year earlier. The U-6 unemployment rate declined slightly to 10.4%. That’s the lowest level in eight years. U-6 includes unemployed, underutilized, and discouraged workers.

The participation rate remained stuck at 62.6%, a 38 year low; this is a measure of the percentage of able-bodied Americans who have a job or are seeking one, and suggests the labor market is doing little to draw people off the sidelines. One reason for the low participation rate is the graying of the Boomer generation. Some 10,000 boomers retire each day, whether they want to or not. For a better read, we can look to the 25 to 54 age group, and we see a very slight decline to 80.7%, indicating that there is still quite a bit of slack in the labor market. This slack means that the unemployment rate can probably drop below 5% before the slack is removed and we start to see any wage push-inflation; maybe quite a bit below 5%.

Among the major worker groups, the unemployment rate for teenagers declined to 16.2 percent in July. The rates for adult men (4.8 percent), adult women (4.9 percent), whites (4.6 percent), Asians (4.0 percent), and Hispanics (6.8 percent) showed little or no change. The unemployment rate  for blacks fell to 9.1%, its lowest mark since April 2008. As recently as May, the rate was over 10%. Blacks have suffered from the highest rates of unemployment. More job growth for blacks bodes well for the rest of the job market.

So, the jobs report came in as expected – no surprises. The economy, and the job market, are improving at the same steady, consistent, gradual rate they have been for half a decade or so. Still this was a solid jobs report. The labor market continues to show solid gains. The Fed has said they just need to see “some” improvement in order to hike interest rates.  That should make it easy for the Fed to hike interest rates sooner rather than later.

With the Fed’s next policy meeting just over a month away, and only one more jobs report to be issued before then, Janet Yellen has a looming deadline, and nothing in today’s report is likely to change the minds of policymakers. This does not mean that a September rate hike is a lock; they might delay if the August jobs report shows a horrible breakdown; they might delay a rate hike if we see the bubble pop in China; they might delay if something unexpected happens; or they might just delay because there is still plenty of slack in the labor market and no signs of inflation.

Indeed, you could make the case for deflation; and that’s what Bill Gross, fund manager at Janus Capital did this morning.  Gross pointed to how the CRB Commodity Index isn’t just at a cyclical low, but lower than in 2008 when Lehman Brothers went bankrupt. He says the commodity markets tell a truer story of what is happening in the economy because they are subject to real-time supply and demand. Oil, metals and crops have plunged as China’s economy has decelerated and gluts in multiple markets have further depressed prices. Still, Gross expects the Fed to increase rates in September.

But should they? It seems like most analysts and fed funds futures are expecting a rate increase in September, but is it the right thing to do? The unemployment rate has dropped to 5.3% but I don’t hear anyone saying we have achieved full employment. Wages have remained sluggish, and that’s being kind. If the Fed takes its foot off the gas too soon, people who might otherwise have found jobs will be left behind. And if the Fed acts now, it might imply that they consider a 2% inflation target is a ceiling on inflation; a point that confines the upper bound. Who says we can’t live happily with inflation just a little higher than 2%? Also, a hike would strengthen the dollar, putting further pressure on exporters, and really putting pressure on emerging market economies.

But there are further considerations in the timing of a rate hike. The Fed is not supposed to be political; don’t believe it. But they don’t want to appear political. If the Fed waits until next year and inflation heats up, they might have to hike rates fast, maybe a bigger rate hike; slamming the brakes on the economy – right before the elections. Or they could make small, incremental hikes, maybe just 25 basis points, starting in September, just tapping the brakes, just a little.

Beyond the politics, the Fed just wants to get a hike done. Zero Interest Rate Policy was implemented during a crisis; we are no longer in emergency mode. It may be time to return to normal. That still doesn’t guarantee a hike in September, something could happen before then; a black swan event could throw us back into emergency mode. But absent that, the Fed wants to increase rates because that gives them some flexibility in case something bad does happen further down the road; they want some tools in their toolbelt.

For Wall Street, good news on the jobs front is bad news for equities. The Dow Industrials were down again today; that makes 7 straight losing sessions, the worst losing streak since the summer of 2011. US investors poured $20.3 billion into low-risk money market funds this week, their biggest inflows since December 2013. Stock funds saw $3.6 billion in outflows, their fourth straight week of withdrawals. So, it looks like the market and investors are coming to terms with, and pricing in, the idea of a Fed rate increase.

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