In this article, we’ll look at the latest employment figures which were released this week. The strong labor market continued in July as both the ADP report and the non-farm payrolls had solid results. This has led the Dow to reach a record close for the 8th straight time. The S&P 500 is very close to its all-time high as it is now up 10.63% year to date. The 10-year bond sold off on the news by 4.08 basis points. The 2-year bond only sold off 1.19 basis points which means the yield curve steepened. This makes sense as good economic results push a yield curve inversion further off. The dollar index was up 0.75% which is unusual for the past few months as it has been in a protracted selloff. This signals confidence in the American economy improved. The chance of at least one rate hike by December increased 1.2% which isn’t much change. There’s still about a 50/50 chance of a rate hike. I think the determining factor will be how well the unwind goes in September-November. If there’s no hiccups, a rate hike is coming. If there are problems, the Fed can give dovish guidance to sooth the markets.
Let’s start by looking at the ADP report. ADP showed private sector payrolls increased 178,000 in July. Mid-sized employers made the most hires as they increased by 83,000. Very small businesses with 1-19 employees hired 27,000 workers. As you can see from the chart below, the skill gap remains the biggest reason small businesses can’t hire even more workers. I think this will take time to adjust, but it will work itself out. If a group of people are unemployed and there are jobs in another field, then they will act in their own interest and learn new skills.
Another issue which I haven’t noted before is that there has been a new trend where less people are moving across county lines. This is because of housing costs, cultural issues, and because licenses only apply to one state. If a business wants workers to move to join the company and they don’t want to, then that creates a gap between what the consumers and small businesses say about the labor market. That’s another issue which should work itself out because if the choice is between having a job and not having a job people will acquire a new license, adapt to the new culture, and commute further to work if they can’t afford a house in the city.
The services sector was very healthy while the goods producing sector was very weak. The weakness in goods producing firms was the most pronounced in manufacturing which lost 4,000 jobs. It is amazing how the manufacturing ISM report was consistent with 4.1% GDP growth while the ADP report says the exact opposite. One small point worth noting is that some firms are replacing machines with jobs people do. That’s a factor which weighs on job growth, but these reports are still the exact opposite of each other. On the other hand, the non-manufacturing ISM was weak, yet the ADP report said it gained 174,000 jobs. The best sector was professional & business which I consider to be a good sign because those are usually well paying jobs.
Looking at the BLS report, the headline number was 209,000 jobs created. The unemployment rate stayed at 4.3%. The revisions from the past two months made for a net increase of 2,000 jobs. The average workweek was flat at 34.5 hours and overtime stayed at 3.3 hours. As you can see from the chart below, the average weekly earnings growth was up 2.8% year over year which is the tied for the best report since 2010. Hourly earnings were up 0.3% month over month and 2.5% year over year. As you can see, finally wage growth is being showed in the BLS reports. On the opposite side, we’ve been seeing a moderate decrease in the Atlanta Fed’s model of wage growth.
The best news of this report was that the labor participation rate increased from 62.8% to 62.9%. The number of people out of the labor force fell by 156,000 to 946.57 million. The worst part of the report was that part-time employment did much better than full-time employment. There were 54,000 less new full-time jobs, while there were 393,000 new part-time jobs. A weird new trend in the data is that those with less than a high school diploma are seeing more job gains than the highly educated. The employment to population ratio increased by 1.6% in the past month for those with less than a high school diploma. Those with a high school diploma or more saw their employment to population ratio fall marginally in the past month.
Finally, let’s look at the changes in jobs by industry according to the BLS report. The report showed the biggest sequential improvement in leisure and hospitality as those increased from 40,000 to 63,000. The manufacturing industry saw an increase of 16,000 jobs which was up from the 12,000 increase last month. It seems that the manufacturing industry did better than what the ADP report indicated, but worse than what the manufacturing ISM showed. That depiction is consistent with the regional Fed manufacturing reports we have looked at in previous articles.
Conclusion
There are a few inconsistencies with various reports, but for the most part the labor market looks strong. The hourly pay saw acceleration and the number of people in the workforce also improved. Adding to the great monthly stats from July, the latest weekly jobless claims report fell 5,000 to 240,000 indicating that the labor market remains solid. It’s easy to wonder about a recession in the next 12-month because there hasn’t been one in so long, but it would be foolish to be on recession watch with the labor market being so strong. I would argue that it’s good news to see those with no education besides elementary school getting jobs because this economy has been tough on them with manufacturing jobs being replaced by robots or shipped overseas.
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