June Labor Report Beats The Highest Estimates

June Labor Report - Job Creation Beats Estimates

Interestingly, the June Labor Report actually be the highest estimates. Unlike many expected, the May labor report was revised to show 72,000 jobs created instead of 75,000 jobs created.

April reading was revised down by 8,000. However, the June report showed 224,000 jobs created which beat estimates for 165,000 jobs and the high end of the estimate range which was 205,000 jobs.

It seems like whenever there is a weak report, a strong one follows. And whenever there is a strong report a weak one follows. That makes the moving averages valuable to review.

As you can see from the chart below, the 3 month moving average improved. But it’s near the low end of its recent range. 12 month moving average fell, and it’s near the middle of its recent range.

3 month average is low because of the weak May reading. Job creation has been slowing in the past few months. That isn’t enough to completely crater the 1 year average.

Local Government Adds 29,000 Jobs

June Labor Report - Most negative aspect of this report is that a large portion of the estimate beat came from government job creation. Government created 33,000 jobs, which was much different from last month when it lost 11,000 jobs. That 11,000 decline was the biggest decline since January 2018; the 33,000 increase was the largest since August 2018.

Government was expected to have added 16,000 jobs. The jump in job creation had nothing to do with the census as the Federal government only added 2,000 jobs. Excluding postal workers, it added 1,000 jobs.

Census will start to show up in the data in the next 6 months. State governments added just 2,000 jobs as well. Majority of the increase came from the local government which added 29,000 jobs, 26,000 of which were non-education jobs.

Even with the government adding so many jobs, private sector payrolls still beat estimates.

June Labor Report - There were 191,000 private sector jobs added which beat estimates for 149,000 and the high end of the estimate range which was 180,000.

As you can see from the chart below, the 1 year growth rate fell slightly. It’s still above its trough in September 2017. Even if economic growth improves, job creation growth might not improve right away.

The labor market is a lagging indicator. There’s also the possibility that the weakness is related to the labor market running out of slack.

June Labor Report - Where The Jobs Were

The chart below shows job creation by industry. There was a remarkable 17,000 job gain in manufacturing which beat estimates for 2,000 jobs and the high end of the estimate range for 6,000 jobs added.

Even though the manufacturing ISM PMI declined, its employment reading increased. Even though that index increased, you wouldn’t expect such a strong number. Especially given the weak PMI, the weak Markit PMI, and the weak regional Fed surveys. This supports the argument that there isn’t a manufacturing recession yet.

ADP report showed there were 7,000 manufacturing jobs added.

June Labor Report - ADP report was also in tune with the BLS reading on education and health services. It showed this industry grouping added 55,000 jobs. BLS report showed it added 61,000 jobs.

The measurement of construction jobs was way different. ADP report showed construction lost 18,000 jobs. And BLS report showed it add 21,000 jobs.

Given the weak May construction report, you would think the ADP report is more accurate, but it’s tough to say. This is something I will watch in the July labor reports and the June construction report.

Unemployment Rate Rises Slightly: It’s Not An Issue

June Labor Report - The unemployment rate increased slightly from 3.6% to 3.7%. It was above estimates for 3.6%. This caused the underemployment rate to increase 0.1% to 7.2%.

That’s still below the previous cycle’s trough. Good news is the labor force participation rate and the age adjusted participation rate increased.

As you can see from the chart below, the labor force participation rate increased from 62.8% to 62.9% which beat estimates for 62.8%.

Prime age labor force participation rate increased from 82.1% to 82.2%. It was the first monthly increase since January when it hit the highest rate since April 2010.

If that January 2019 peak is the cycle high, it would be the lowest peak since the early 1980s. That's when there weren’t as many women in the workplace.

In May 1981, the male participation rate was 25.1% higher than the female rate. Now it is 11.8% higher.

June Labor Report - Average hourly earnings growth was 0.2% on a monthly basis

It was below estimates for 0.3% growth.

May reading was revised up 0.1% to 0.3%. Average hourly earnings growth on a yearly basis was 3.1% which fell from 3.2%. Similarly, the growth rate in May was revised up one tenth to 3.2%.

Average work week length was steady at 34.4 hours which missed estimates for 34.5 hours. Weekly earnings growth only fell one hundredth of a percent to 2.84%. Workers are in fine shape especially because inflation is falling.

Don’t ignore inflation. Its decline makes up for the weakness in nominal wage growth. We don’t have the CPI data from June yet, but inflation fell from 2% to 1.8% in May. It’s down from its recent peak of 2.95% in July 2018.

June CPI report comes out this Thursday. Consensus expects yearly headline inflation to fall from 1.8% to 1.6%. Core CPI is expected to stay at 2%.  

June Labor Report - Conclusion

The June jobs report was solid. This explains why the odds of a 50 basis point rate cut on July 31st diminished greatly.

Some would even argue there shouldn’t be any rate cuts, but that cut is locked in. There will probably be one more cut by the end of the year. The most interesting part of the July Fed meeting might be the explanation as to why the Fed cut rates.

Especially when the labor market is in solid shape. If I had to guess, the main culprit will be low inflation. There certainly is a slowdown. But the Fed doesn’t always cut rates during slowdowns. 

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