Orlando's Outlook: Employment fireworks
Bottom line The Labor Department set off some Independence Day fireworks this morning, reporting that nonfarm payrolls surged by a much stronger-than-expected 288,000 jobs in June, with an upward revision of another 29,000 jobs in April and May. We’ve now enjoyed five consecutive months of 200,000 or more jobs added to the economy for the first time in nearly 15 years, with a solid average gain of more than 248,000 jobs. In addition, the unemployment rate fell to a 6-year low of 6.1% last month, while the number of long-term unemployed fell to a 5-year low. Nagging areas of concern continue to be flat hours worked, modest 2.0% year-over-year wage growth, and a 36-year cycle low at 62.8% for the labor force participation rate. But we continue to believe that this broader rebound in the labor market is sustainable. Initial weekly jobless claims are still running at a 7-year low, while nearly 83% of the job creation in June’s private ADP report was focused in small- and mid-sized companies. These two important leading indicators augur well for continued labor-market strength.
Nonfarm payrolls soar June rose by 288,000 jobs, which was significantly stronger than the Bloomberg consensus estimate for a gain of 215,000 jobs, although it was only slightly above our own, admittedly more aggressive, estimate for a gain of 273,000 jobs. In addition, the Bureau of Labor Statistics (BLS) revised April and May higher by a combined 29,000 jobs. April’s preliminary increase of 288,000 jobs, which was revised down slightly to a gain of 282,000 last month, was revised back up to a final gain of 304,000 jobs. May’s preliminary gain of 217,000 jobs was revised up to a gain of 224,000 jobs. So the 5-month average gain of more than 248,000 new jobs through June is roughly triple December’s hugely disappointing, weather-impaired final gain of only 84,000 jobs. It now exceeds the average 222,000 jobs generated over the 4-month period from August through November 2013.
Private payrolls strong, too June posted a very strong gain of 262,000 jobs, well above the Bloomberg consensus forecast for a gain of 215,000 private jobs, and the BLS added 16,000 jobs in April and May. April’s preliminary gain of 273,000 jobs, revised down slightly to an increase of 270,000 last month, was revised back up to a final gain of 278,000 jobs. May posted a solid gain of 216,000 jobs last month, revised up to a gain of 224,000 private jobs. Compared with December’s weak final gain of only 86,000 new jobs, the 5-month average gain of 233,000 private jobs through June is almost triple that weather-impacted cycle trough, outpacing the 4-month average gain of 216,000 jobs from August through November 2013.
ADP solid with strong job mix This forward-looking proxy for private payroll growth added a much stronger-than-expected 281,000 jobs in June—its strongest such reading since November 2012—compared with a Bloomberg consensus of 205,000 jobs, an unrevised May reading of 179,000 jobs and an upwardly revised April reading of 220,000 jobs. So, the trailing 4-month average gain through June is now a solid 218,000 jobs. Importantly, ADP also reported that in June, small firms (with less than 50 employees) added 117,000 jobs (42% of the total); mid-sized companies (between 50 and 500 employees) added 115,000 jobs (41%); and larger companies (with more than 500 employees) added 49,000 workers (17%). 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.
Initial weekly jobless claims steady Initial weekly jobless claims—another important leading-employment indicator—fell to 298,000 for the week ended May 10, a 7-year low. Since then, claims have been bouncing along in the low 300,000s. The all-important “survey week” for the June jobs report saw claims at 318,000, and the smoother 4-week moving average for the week ended June 28 sits at 315,000, just above a 7-year low.
Strong household rebound The volatile household survey added 407,000 jobs in June, a strong rebound from the gain of 145,000 jobs in May and the loss of 73,000 jobs in April, comparable to the addition of 476,000 jobs in March. This rebound is very promising, as the household survey is also an important leading indicator for nonfarm and private payrolls.
Manufacturing back on track As we had expected, June added 16,000 jobs, up from May’s addition of 11,000 jobs, April’s 9,000 and March’s only 4,000. February had added 20,000 jobs. That’s consistent with the ISM manufacturing index sitting just off a 2014 high of 55.3 in June, and auto production at an 8-year high of 16.92 million annualized units.
Construction still sluggish Although the housing market has begun to perk up recently, that had not, as yet, translated into better construction-hiring trends, as construction added only 6,000 jobs in June, after upwardly-revised additions of 9,000 jobs in May and 36,000 jobs in April. January, in sharp contrast, had hit a 6-year cycle high at 51,000 jobs added, so we’ve got plenty of upside in this category.
Retail hiring accelerates After a solid Easter season and an increased level of personal savings, retailers are beginning to position for an upbeat Back-to-School season, adding 40,000 jobs in June, after adding a downwardly revised 11,000 new jobs in May and a strong 43,000 new jobs in April and 29,000 jobs in March.
Temps soften Temporary help—another important leading indicator of employment growth—added only 10,000 new jobs in June after growing by 16,000 jobs in May, 15,000 jobs in April and 22,000 jobs in March. This bears watching.
Education & health still solid This category added 38,000 jobs in June, after adding 62,000 new jobs in May, 32,000 jobs in April, 40,000 jobs in March and 32,000 jobs in February. In sharp contrast, education and health grew by a tepid 16,000 jobs in January and only 5,000 jobs in December 2013.
Leisure gains steady This economically sensitive category grew by 39,000 new jobs in June, on the heels of upwardly revised additions of 45,000 new jobs in May and 32,000 in April.
Local hiring drives government The difference between private and nonfarm payroll gains in June resulted in the addition of 26,000 federal, state and local government jobs last month, compared with no change in May and an upwardly revised gain of 26,000 in April. June’s strength was largely driven by local government hiring, particularly in education, which added 18,000 jobs. But our research friends at Goldman Sachs remind us that local government education tends to be volatile in June and September, as the school season ends and begins.
Unemployment enjoys a 'good' decline The unemployment rate (U3) fell to 6.1% in June—its lowest level since September 2008—from 6.3% in May. 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, slipped a tick to 12.1% in June. These are considered to be “good” declines because of the aforementioned increase in household employment by 407,000 workers and the concurrent reduction in the number of unemployed persons by 325,000. The labor-force participation rate remained at a 36-year cycle low of 62.8% in June. Importantly, the number of people who are out of work for 27 weeks or longer—the so-called “long-term unemployed”—declined as a percentage of all jobless people to 32.8%, a 5-year low. This is likely due to the elimination of long-term unemployment benefits, which encourages these people to look for and accept a job rather than remain on indefinite government support.
Wages improve, hours worked remain stagnant Average hourly earnings rose by 0.2% in June, the same percentage change in May. Year-over-year wages rose by 2.0% in June, down a tick from the 2.1% pace in May. The average private work week for all employees was flat for the fourth consecutive month at 34.5 hours in June. That’s discouraging, because 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.