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Friday, July 08, 2016

June Jobs Report

Financial Review

June Jobs Report

DOW + 250 = 18,146
SPX + 32 = 2129
NAS + 79 = 4956
10 Y – .02 = 1.37%
OIL + .05 = 45.19
GOLD + 4.80 = 1365.60

*S&P just shy of intraday and closing record highs, going back to May 2015.

The Jobs Report for June showed the economy added 287,000 new jobs, and the unemployment rate rose to 4.9% in June from 4.7% as more people entered the labor force in search of work. The results topped consensus estimates around 175,000.

June payrolls were boosted by the return of 35,000 striking workers at Verizon. The May report was revised from 38,000 down to 11,000. April’s gain was revised higher to 144,000 from 123,000. April and May revisions resulted in a net loss of 6,000 jobs compared to initial estimates.

Goldman analysts blamed the month to month discrepancy on weather, saying that during April and May, industries most affected by weather barely hired. Construction, leisure and hospitality and retail, added just 4,000 jobs compared to 113,000 in October through March. Construction hiring was again low in June.

Another consideration is seasonal adjustments based on the school year. In May, we saw a decline in the unemployment rate and a drop in labor-force participation. The change suggested that unemployment was falling for “bad reasons,” as discouraged workers gave up looking for work. Reinforcing that notion, the share of unemployed workers leaving the labor force spiked, on a seasonally adjusted basis.

The unadjusted data painted a different picture. When schools finish up in May, more students start looking for work, which adds people to the labor force. So normally, in data that aren’t adjusted for seasonal fluctuations, fewer people drop out of the workforce from jobless rolls during the month.

That big slowdown in dropouts we usually see in May didn’t happen this year. So when the normal seasonal adjustment was applied, it magnified the flows out of the labor force. That, in turn, helped push the unemployment rate down to 4.7 percent, even though the report only showed 11,000 new jobs created.

In June, however, the slowdown in labor-force dropouts played out more fully. The unemployment rate jumped back 0.2 percentage point, while the participation rate rose 0.1 percentage point, and the economy added 287.000 new jobs.

The numbers in May and June were probably flukes, or outliers. So we can look at broader trends. The US added an average of 147,000 jobs in the past three months. Over the past six months the economy has averaged 172,000 net new jobs per month. Clearly the trend is down from an average of 230,000 per month in 2015, but that is to be expected at this point in the economic cycle.

Taking account of the growing numbers of retiring baby boomers and the population growth, 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 Labor Force Participation Rate increased in June to 62.7%, up from May’s 62.6 percent, close to its lowest level since the 1970s. The U-6 unemployment rate declined to 9.6%. The U-6 rate includes the unemployed, the underemployed and the discouraged – people who have given up looking and are no longer counted in the headline number.

While the U-6 rate has made substantial gains in the past years, it remains stubbornly at pre-recession levels. There are 1.97 million long-term unemployed (that’s more than 26 weeks), and that number is up from 1.88 million May. The number of part-time workers who prefer full-time jobs fell by nearly 600,000.

And the ranks of temporary workers increased by 15,000 after falling by 19,000 in May and posting meager gains in recent months. Employers often add such contingent workers before hiring permanent staffers. And even though more than 400,000 candidates jumped back into the labor market, the low labor force participation rate indicates there is still plenty of slack.

Leisure and hospitality added 59,000 jobs in June, following little employment change in the prior month. Job gains in leisure and hospitality have averaged 27,000 per month thus far this year, down from an average of 37,000 in 2015.

Health care and social assistance added 58,000 jobs in June. Employment in financial activities rose by 16,000 in June. Employment in information increased by 44,000 in June. Employment rose in telecommunications (+28,000), largely reflecting the return of workers from the Verizon strike.

Employment in professional and business services continued to trend up in June (+38,000). The industry has added an average of 30,000 jobs per month, compared with an average monthly gain of 52,000 in 2015.

Employment in retail trade edged up by 30,000 in June, after changing little over the prior 2 months; a positive sign for consumer spending. Retail trade has added 313,000 jobs over the year.

Employment in mining continued to trend down in June (-6,000). Since reaching a peak in September 2014, mining has lost 211,000 jobs. Employment in other major industries, including construction, manufacturing, wholesale trade, transportation and warehousing, and government, showed little or no change in June.

Average hourly wages rose 2 cents to $25.61 in June. In June, the average workweek for all employees on private nonfarm payrolls was 34.4 hours for the fifth consecutive month. Hourly pay increased 2.6% in the 12 months to June 2016, matching the highest level of the recovery; that’s good enough to outpace inflation, so wage gains mean more money in workers pockets, still the gains are not enough to raise concerns about wage push inflation.

More than a dozen cities and states raised wages this year, and those higher pay floors should cause a ripple of extra earnings for people making as much as 20 percent more than the minimum. For states like New York and California, which will increase wages to $15 an hour over the next few years, those benefits will extend to people making $18 an hour. Wage increases above the minimum wage are believed to be a response to what economists call “wage compression,” which occurs when more senior employees are no longer better compensated than less senior employees.

Say you worked at a fast food restaurant in Washington, D.C., at the old local minimum of $10.50. On July 1, your hourly wage increased to $11.50. That’s great news for you, but the shift manager getting paid $12 an hour may not be overjoyed about your sudden good fortune.  There is a hierarchy in wages, but anything above the minimum is discretionary, and that ripple effect only extends to about 20% of the wage scale, give or take.

Overall, only about 3 percent of workers are paid minimum wage, according to an analysis by the Brookings Institute. But nearly 30 percent of workers make less than 1.5 times the minimum wage. By that rough calculation, about 35 million workers could see raises if the minimum increased. The minimum wage does more than simply shift the wage distribution toward higher pay — it effectively compresses the lowest wages.

The end result is a reduction in wage inequality below the median wage — a little under $30,000 for individuals. Beyond that, the impact of increases in minimum wage don’t seem to affect middle income and upper income workers.

Of course, the bigger debate about minimum wage is whether it will mean fewer jobs; the basic idea is that raising the price of anything reduces demand. But there are other factors that must be considered. When workers earn more there is less turnover and productivity increases.

Also, lower wage workers tend to spend almost everything they make, meaning the wages are circulated, increasing the velocity of the money, and stimulating the economy. The net effect is mildly positive, with a lag time.

One of the recurring complaints from employers is that they have a hard time finding skilled workers. Wages of high school dropouts are lower than they were at the turn of the century in real terms. The same goes for workers with a high school diploma, and also for workers who went to college but stopped short of a bachelor’s degree. Although some of the hardest to fill jobs in the country don’t require college degrees: chefs, butchers, bakers, mechanics and electricians. These jobs certainly require skills.

The most obvious solution would be to train workers for skills that are in demand. The problem is that we don’t see much job training in the US. According to the Organization for Economic Cooperation and Development, the United States government spends only 0.03 percent of its gross domestic product on worker training, well below budgets for other developed nations. Penny wise, pound foolish.

The Federal Reserve is back in the game. That’s the simple message from the strong June jobs report. That said, don’t expect a rate hike this month. The May jobs report appeared to spook the central bank and convinced investors the Fed would keep rates on hold all year. Though most Fed officials have continued to signal a desire to raise rates at least once in 2016, minutes from the Fed’s June 14-15 meeting, released on Wednesday, showed the Federal Open Market Committee “generally agreed” they needed to see more data before contemplating another hike.

The Fed won’t overreact to one strong report any more than it would to a single weak one. The Fed will almost certainly remain on hold at their next meeting on July 26-27. Prior to the report this morning, markets had priced in one rate hike through the end of 2018; now the CME Fedwatch calculates a 23% chance of a rate hike by December.

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