Orlando's Outlook: Will solid June jobs let Fed, "See you in 'Septaper?' "
Bottom line June’s stronger-than-expected nonfarm and private payroll report, complete with sizable upward revisions for both April and May, suggests the U.S. economy is successfully transitioning from its early-year fiscal policy drag (related to higher tax rates and the automatic spending sequester) to a more constructive “Wealth Effect,” driven by rising equity and real-estate prices. In addition, hourly wages rose by the most in nearly two years, the labor-force participation rate ticked up for the second month in a row, and construction, retail and temp hiring all posted nice gains. Also, given the positive trends in leading indicators for the job market, such as the ADP report and the initial weekly jobless claims, we expect that June’s labor-market strength could accelerate in the second half of this year.
To be sure, this morning’s report was not universally positive. Manufacturing declined a fourth consecutive month, government hiring fell again, the labor-impairment rate (U-6) surged due to an increase in discouraged and underemployed workers, hours worked were flat and the pace of improvement in the household survey decelerated sharply from very strong April and May levels. Moreover, investors may view today’s report through the monetary-policy prism of “good news is bad news,” and conclude that at this pace of improvement in the labor market, the Federal Reserve may soon begin to taper its aggressive $85-billion per month in bond purchases, perhaps as early as the policy-setting Federal Open Market Committee (FOMC) meeting on Sept. 17-18. As a result, benchmark 10-year Treasury yields are soaring to a cycle-high of 2.70% this morning.
Solid nonfarm payroll gains June rose by a much stronger-than-expected 195,000 jobs, well above consensus estimates for a gain of 165,000 jobs but only slightly higher than Federated’s admittedly optimistic forecast for a gain of 190,000 jobs. In addition, the Bureau of Labor Statistics (BLS) revised April and May higher by a combined 70,000 jobs. April’s preliminary gain of 165,000 nonfarm jobs, which was revised down to a more modest gain of 149,000 jobs last month, was revised sharply higher to a final gain of 199,000 jobs. May’s preliminary increase of 175,000 jobs was revised higher to a gain identical to June of 195,000 jobs. So over the past three months, the economy created a solid average of 196,000 jobs, well above March’s level of 142,000 jobs but still well below February’s much stronger final gain of 332,000 jobs. So the Fed, in our view, is warming up in the bullpen as job creation is beginning to firm at solid and sustainable levels.
Private payrolls look good, too June added 202,000 jobs, much higher than the consensus forecast for a gain of 175,000 private jobs, and the BLS collectively revised April and May up by 60,000 jobs. April’s preliminary increase of 176,000 jobs, which was revised down to a gain of 157,000 last month, was revised sharply higher to a final gain of 188,000. May’s preliminary gain of 178,000 was revised up to a much stronger gain of 207,000 jobs. So the trailing three-month average of 199,000 is now well above March’s gain of 154,000 jobs but again well below February’s powerful final gain of 319,000 private jobs.
What’s up with the Fed’s timing? As we had expected, the Fed did nothing at its recent FOMC meeting on June 18-19 regarding its eventual decision to begin to taper its aggressive $85 billion in monthly bond purchases. This ultimately will be a data-dependent decision, and the labor market is just now finally showing signs that it could exceed the creation of 200,000 new jobs per month during the third quarter. If that turns out to be the case, then the Fed may explore commencing its tapering plan as early as the upcoming September FOMC meeting, which is sparking a rout currently in benchmark 10-year Treasury yields. While equity investors may also suffer some knee-jerk indigestion, this ultimately will be a long-term positive for stocks because it means that for the first time in five years, the Fed is comfortable enough with the prospects for growth in the U.S. economy to begin to withdraw its extraordinary monetary accommodation.
Household gains slow The household survey rose by 160,000 jobs in June, roughly half the robust pace of 319,000 jobs added in May and 293,000 jobs added in April. True, this is a volatile series month-to-month, as March had lost 206,000 jobs, while February had added 170,000 positions. But the household survey is an important leading indicator for both nonfarm and private payroll growth, so this slowing pace of job creation in June is worrisome.
Manufacturing slumps again Despite a solid rebound from contraction territory in the national ISM data to 50.9 in June and a surge in auto sales last month to a six-year high of 15.89 million units, manufacturing lost jobs for the fourth consecutive month, dropping 6,000 jobs in June on the heels of 7,000 lost jobs in each of May and April, and 4,000 lost jobs in March. Manufacturing had posted a robust gain of 23,000 new jobs in February, and we expect that manufacturing may turn positive again during this year’s second half.
Construction rebounding With recovery work from Hurricane Sandy in full swing in the Northeast and the national housing market surging, construction added 13,000 jobs in June after adding 7,000 jobs in May and losing 7,000 jobs in April. Construction had added 16,000 jobs in March and a powerful gain of 48,000 jobs in February, which was a six-year cycle high, so we can bounce much higher here in coming months.
Temp hiring stays positive Temporary help, another important leading indicator of employment growth, gained 10,000 jobs in June, compared with gains of 24,000 jobs in May, 21,000 in April, 20,000 in March and 28,000 in February.
Retail soars With consumer confidence at roughly a six-year high and with retail sales gaining strength during April and May, retailers added 37,000 jobs in June—with a decided auto and housing flavor to them—compared with gains of 27,000 jobs in May and 22,000 jobs in April. Retail lost 3,000 jobs in March, which was also a poor sales month, and gained 26,000 jobs in February, which was a strong month for retail sales. We continue to believe that the important Back-to-School season in July, August and September will be strong.
Government loses jobs again The difference between private and nonfarm payroll gains in June was the loss of 7,000 federal, state and local government jobs, compared with losses of 12,000 jobs in May (originally reported as a loss of only 3,000 jobs), and a revised gain of 11,000 jobs in April (originally reported as a loss of 11,000). Most of the federal losses from the automatic spending sequester were achieved through temporary furloughs rather than permanent layoffs.
Unemployment rate flat, participation rises, impairment surges The (U3) unemployment rate was unchanged at 7.6% in June, just above the five-year low of 7.5% in April. The labor-force participation rate ticked up for the second-consecutive month to 63.5% in June from a 34-year cycle low of 63.3% in April due to an increase in the civilian labor force of 177,000 in June, on top of gains of 420,000 in May and 210,000 workers in April, versus a decline of 496,000 workers in March. We continue to believe that unemployed workers are now beginning to feel sufficiently confident that they can actually find a job, so they are starting to actually look for work again. The number of unemployed people rose by 17,000 in June. The labor impairment rate (U6)—also known as the “total” rate of unemployment because it more broadly includes discouraged workers and the underemployed—soared to 14.3% in June from 13.8% in May due to a sharp rise in the number of underemployed. This may be related to businesses’ early efforts to gain compliance with the pending Affordable Care Act as many companies are intentionally reducing many of their employees’ hours from full-time to less than 30 hours per week to avoid having to provide health insurance.
Wages up, hours worked flat Average hourly earnings rose by 0.4% last month, the largest such increase in nearly two years, compared with a muted 0.1% wage growth in May, while year-over-year wages rose by 2.2% in June, compared with a 2.0% annual pace in May. The average private workweek for all employees was also unchanged at 34.5 hours in June for the third consecutive month. That’s significant as a change of only 0.1 hours worked is the equivalent of adding or subtracting an estimated 300,000 to 400,000 jobs to or from the economy.
ADP surges The ADP report, an important forward-looking proxy for private payroll growth, rose by a much stronger-than-expected 188,000 jobs in June, which was well above consensus expectations for a gain of 160,000 jobs. The preliminary gain in May of 135,000 was revised down a tick to 134,000 jobs, and the preliminary gain of 119,000 in April, which was revised down to an increase of 113,000 last month, was revised back up to a final gain of 124,000 jobs. The ADP survey, now nine months into a new methodology, averaged a solid 202,000 new jobs created per month from October through February, so the revised average of only 137,000 jobs for March, April and May represents a disappointing pace that is one-third slower. So June’s spike back up to 188,000 jobs is certainly good news.
ADP also reported that in June, small firms (with less than 50 employees) added 84,000 jobs, which is 45% of the total; mid-sized companies (between 50 and 500 employees) added 55,000 jobs (29% of the total); and larger companies (with more than 500 employees) adding 49,000 workers (26%). Because it takes the BLS a month or two longer to identify new employees from small- and mid-sized companies compared with larger companies, that inherent lag contributes to the leading-indicator nature of the ADP report.
Initial weekly jobless claims improve steadily Initial weekly jobless claims, an important leading economic and employment indicator, are at 343,000 for the week ended June 29, 2013, and the smoother four-week moving average is now at 345,500. To be sure, the corresponding “survey” week for today’s June labor report was for the week ended on June 15, during which weekly claims were 355,000. The positive declining trend for initial weekly claims into month-end augurs well for the July employment report, which will be released on Friday, Aug. 2.