Federated’s Orlando: Bad news is good news
Philip Orlando, group head of Macro/Balanced and Growth/Income Teams as well as chief equity strategist and senior portfolio manager at Federated Investors comments on the outlook for the US economy.
In the softest employment report of the year, the Labour Department announced this morning that nonfarm payrolls rose by a much weaker-than-expected 142,000 jobs in August, with a downward revision of another 28,000 government jobs in June and July. That breaks the labor market’s solid six-month run, from February through July. The economy added 200,000 or more jobs in each of those months for the first time in 17 years, with an average monthly gain of nearly 240,000 jobs. But today’s headline miss is completely inconsistent with strength emanating from other pockets of the economy. Among those is a second-quarter Gross Domestic Product (GDP) of 4.2%, an eight-year high in August auto sales to an annualized run rate of 17.45 million units, a three-year high to 59.0 in August’s ISM manufacturing survey and a seven-year high in consumer confidence in August to 92.4.
In fact, our research friends at ISI report that quirky August payrolls are typically revised up by 70,000 jobs, and according to The Wall Street Journal, the initial August figures have been revised up by an average of 90,000 jobs the past three years, the highest monthly revision of any of the 12 months. In our view, this development is likely to be the case again this year. But the silver lining to this labor report that was clearly disappointing across the board—save for a tick up in wage inflation—is that it’s now inconceivable that the Federal Reserve will signal for a more aggressive timetable to increase the federal funds rate when the FOMC next meets on September 16-17. That will keep the policy hawks tethered to the sidelines and the equity-market perma-bears playing catch-up.
Nonfarm payrolls miss badly August rose by a hugely disappointing 142,000 jobs, much weaker than the Bloomberg consensus estimate for a gain of 230,000 jobs, and the Bureau of Labor Statistics (BLS) revised June and July lower by a combined 28,000 jobs. July’s preliminary gain of 209,000 jobs was revised up slightly today to a gain of 212,000 jobs. June’s preliminary gain of 288,000 jobs, which was revised up to a gain of 298,000 jobs last month, was revised back down to a still-solid final gain of 267,000 jobs. But the labor market’s strong six-month run from February to July, with an average monthly gain of almost 240,000 jobs, has clearly been snapped, as August’s massive headline miss is nearly 100,000 jobs under that level.
Private payrolls miss, too August also posted a disappointing gain of only 134,000 jobs, which was well below the Bloomberg consensus forecast for a gain of 214,000 private jobs, although the BLS did add 5,000 jobs in June and July. July’s preliminary gain of 198,000 jobs was revised up to 213,000 jobs this morning. June’s preliminary gain of 262,000 jobs, which was revised up to an increase of 270,000 last month, was revised back down to a final gain of 260,000 jobs this morning. However, compared with the six-month average gain from February through July of 230,000 private jobs, this morning’s miss was sizable.
Households plunge In perhaps the most disappointing aspect of today’s labor report, the admittedly volatile household survey added only 16,000 jobs in August, down sharply from gains of 131,000 jobs in July, 407,000 in June and 145,000 in May. The survey had lost 73,000 jobs in April. The household survey is also an important leading indicator for nonfarm and private payrolls.
Wages up, hours flat The most promising development this month was that average hourly earnings rose by 0.2% in August, which was a tick faster than in July. Year-over-year wages rose by 2.1% in August, which was the same pace as an upwardly revised July and a tick better than June’s pace. The average private work week for all employees was flat for the sixth-consecutive month at 34.5 hours in August. This remains problematic, as a change of only 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy.
Unemployment, labor impairment and participation rates all slip The unemployment rate (U3) ticked down to a six-year low of 6.1% in August. The labor impairment rate (U6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—fell to 12.0% in August from 12.2% in July. The labor-force participation rate slipped a tick back to a 36-year cycle low of 62.8% in August. These declines, however, all came about for the wrong reasons, due to the aforementioned tepid rise in household employment and a decline of 80,000 unemployed workers, largely due to 64,000 discouraged workers leaving the labor force. The only bright spot, per se, was that the number of long-term unemployed (those out of work for 27 weeks or more) fell to 2.96 million, the lowest such level since January 2009. In our view, the elimination of extended unemployment benefits has forced these people to find a job to support their families, rather than stay out of work and rely on government transfer payments.
Initial weekly jobless claims just above cycle lows Initial weekly jobless claims—an important leading economic and employment indicator—hit a 15-year low of 279,000 for the week ended July 19. The smoother four-week moving average for the week ended August 2 fell to an eight-year low of 293,500. More recently, the survey week for August touched 299,000 claims, with the most recent reading for the week ended August 30 at 302,000.
ADP better by comparison This forward-looking proxy for private payroll growth added a weaker-than-expected 204,000 job in August (versus a Bloomberg consensus of 220,000 jobs), so this miss was much smaller. That compares with 212,000 jobs in July(revised down from 218,000) and 297,000 jobs in June (revised up from 281,000), its strongest reading since November 2012. The trailing five-month average gain through August is now 226,000 jobs. ADP also reported that in August, small firms (with less than 50 employees) added 74,000 jobs (38% of the total); mid-sized companies (between 50 and 500 employees) added 75,000 jobs (37%); and larger companies (with more than 500 employees) added 52,000 workers (25%). The BLS typically takes a month or longer to identify new hires from smaller companies, which contributes to the leading-indicator nature of the ADP report.
Manufacturing flat No jobs were added in August, down sharply from 28,000 jobs added in July and 21,000 jobs in June. That’s certainly puzzling, with the ISM manufacturing index at a three-year high of 59.0 in August and auto production at an eight-year high of 17.45 million annualized units. But that auto-related strength is part of the problem here, as there were fewer auto-plant shutdowns for re-tooling in July, which means that there was a smaller-than-normal ramp-up in August.
Construction enjoys another solid month With the housing market strengthening over the summer, construction added 20,000 jobs in August and an upwardly revised 31,000 jobs in July. That compares with only 8,000 jobs in June and 9,000 jobs in May. But January had hit a six-year cycle high at 51,000 jobs, so we’ve got plenty of upside.
Retail loses The chain-wide employee strike at Market Basket grocery stores in New England this summer cost this category a loss of 17,000 jobs, which contributed to an overall loss of 8,000 retail jobs in August. (The strike has since ended, and employees are back to work this month.) In sharp contrast, retail had added 21,000 new jobs in July and 35,000 jobs in June. With record consumer confidence and a two-year high in personal savings, we are expecting a solid Back-to-School (BTS) season in August and September, so these numbers should bounce.
Temps steady Temporary help—another important leading indicator of employment growth—added 13,000 jobs in August versus 10,000 jobs in July and 15,000 in each of April, May and June.
Education & health revised higher As we had expected, August was relatively strong at 37,000 new jobs, while July was revised sharply up from 17,000 to 33,000 jobs, compared with stronger gains of 48,000 jobs in June and 59,000 in May.
Leisure soft This economically sensitive category added only 15,000 jobs in August, while July was revised down from a preliminary gain of 21,000 jobs to a more tepid gain of only 12,000 jobs. That compares with 21,000 in June, 45,000 jobs in May and 32,000 in April.
Balanced government hiring The difference between private and nonfarm payroll gains in August resulted in the addition of 8,000 federal, state and local government jobs last month, all of which contributed positively (federal added 3,000 jobs, state 1,000 and local 4,000). That compares with sharp downward revisions to a loss of 1,000 jobs in July (originally a gain of 11,000 jobs) and to a gain of only 7,000 jobs in June (down from an original gain of 28,000 jobs).