Orlando's Outlook: Surprisingly strong June jobs report keeps Fed on pace

07-07-2017

Bottom line The labor market shrugged off a disappointing ADP report and elevated survey-week jobless claims last month to produce much stronger-than-expected nonfarm payrolls in June, along with sharply positive revisions for April and May. Moreover, the household survey enjoyed a powerful bounce in June from a negative reading in May, while hours worked and the participation rate both ticked up last month.

Looking at the first six months of 2017, it’s now abundantly clear March was an aberration, with a weather-impaired gain of only 50,000 jobs thanks to winter-storm Stella. But the other five months have collectively produced average payroll growth of a solid 206,000, which suggests employment trends remain healthy.

Consequently, in conjunction with recent strong ISM and Chicago PMI readings, as well as the upward revision to first-quarter GDP growth, we do not believe that today’s jobs report in any way dissuades the Federal Reserve from continuing on its current policy course over the second half of this year, which is to hike interest rates again and begin the process of unwinding its $4.5 trillion balance sheet.

Surprisingly good month in June for nonfarm payrolls They added a stronger-than-expected 222,000 jobs, significantly above the Bloomberg consensus of 178,000 and our own more conservative 168,000 estimate here at Federated. The Bureau of Labor Statistics (BLS) revised April and May sharply higher by a combined 47,000 jobs. April’s preliminary increase of 211,000 jobs, revised down last month to a gain of 174,000, was revised this morning back up to a final gain of 207,000 jobs. May’s preliminary addition of only 138,000 jobs was revised up to a gain of 152,000 jobs this morning. So excluding March’s weather-impaired final gain of only 50,000 jobs, the year’s first half averaged a healthy 206,000 jobs per month.

Private payrolls strong, too They added a better-than-expected 187,000 jobs in June, well above the Bloomberg consensus of 170,000. The BLS revised April and May higher by a combined 33,000 jobs. April’s preliminary report of 194,000 added jobs, revised down last month to a gain of 173,000 jobs, was revised this morning back up to a final gain of 194,000. May’s preliminary gain of only 147,000 jobs was revised up to an increase of 159,000 jobs this morning. Stripping out March’s paltry final gain of only 59,000 jobs, largely due to winter storm Stella, the first half of this year averaged a solid 193,000 added jobs per month.

ADP comes back to earth The ADP National Employment Report, a forward-looking proxy for private payroll growth, reported the disappointing addition of only 158,000 jobs in June (versus consensus expectations for a gain of 188,000 jobs), compared with May’s downwardly revised gain of 230,000 (originally reported as a gain of 253,000). We were particularly distressed by the plunge in hires by small businesses in June. Small firms with fewer than 50 employees added only 17,000 jobs in June (11% of total, compared with May’s downwardly revised 58,000—from 81,000—or 25% of its total); midsized companies with 50 to 500 employees added 91,000 (57%, compared with April’s downwardly revised 111,000, or 48%); and larger companies with more than 500 employees hired 50,000 (32%, compared with May’s upwardly revised 61,000, or 27%).

Jobless claims edge higher Initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended June 17 rose to 242,000 (versus 233,000 in the May survey week), which is trending the wrong way from the 44-year cycle low of only 227,000 set in February. We’ll be watching claims data closely over the next two months, as auto companies tend to take their retooling furloughs now, particularly with slower sales thus far in 2017. But generally speaking, companies continue to have difficulty finding workers with the right skills, so they are holding on to employees.

Government hiring soars by most in almost a year As the difference between private and nonfarm payrolls, the government collectively added 35,000 federal, state and local government jobs in June. That compares with a loss of 7,000 jobs in May, a gain of 13,000 jobs in April and a loss of 9,000 jobs in March. In June, the feds added 4,000 jobs and states slashed 4,000 jobs, but local governments added 35,000 jobs, perhaps reflecting seasonal workers hired to staff camps and summer-school sessions.

Household jobs rebound The admittedly volatile household survey added 245,000 jobs in June, after losing 233,000 positions in May, for a month-over-month (m/m) swing of nearly a half-million jobs. That compares with adding 156,000 jobs in April, 472,000 jobs in March and 447,000 jobs in February. A leading indicator for nonfarm and private payrolls, June’s solid gain in household employment is encouraging for future payroll gains in July. It also serves as the basis for the official unemployment rate (U-3).

Unemployment, labor-impairment and participation rates all rise In its strongest gain of the year, the civilian labor force rose by 361,000 workers in June, reversing a sharp loss of 429,000 workers in May. That compares with gains of only 12,000 in April, 145,000 in March, 340,000 in February and 76,000 in January. As a result, the unemployment rate, calculated from the sharp rise in the civilian labor force compared with the slower increase in household employment, ticked up to 4.4% in June from 4.3% in May (its lowest level since February 2001). The labor-impairment rate (U-6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—similarly rose to 8.6% in June from 8.4% in May (its lowest level since November 2007). But that’s still down from 9.4% in January. In a positive development, the labor-force participation rate (the share of working-age people in the labor force) ticked up to 62.8% in June, although it’s still below its 2-year high of 63.0% in March. The 38-year cycle low of 62.4%, was set in October 2014.

Hours worked and wage growth rise The average private workweek for all employees ticked up to 34.5 hours in June, compared with 34.3 hours in both March and February, which had matched a 2-year low. That’s good news, as an increase of 0.1 hour worked is the equivalent of adding an estimated 350,000 or more jobs to the economy. Hourly wages ticked up on a m/m basis, rising 0.2% in June, versus a downwardly revised 0.1% gain in May. On a year-over-year (y/y) basis, wages increased only 2.5% in June, up a tick from a downwardly revised 2.4% gain in May. But that’s still down from an 8-year, cycle-high gain of 2.9% in December.

Construction and manufacturing both increase Construction hiring rose by 16,000 jobs in June, compared with a gain of 9,000 jobs in May and breakeven in each of April and March. But that’s still down sharply from a gain of 54,000 jobs in an unseasonably warm February, the largest gain since March 2007. Manufacturing gained a modest 1,000 jobs in June versus the loss of 2,000 jobs in May, after solid gains of 9,000 jobs in April, 11,000 in March and 22,000 in February (a 3-year high). We’re bracing for potential auto furloughs this summer, which could negatively impact this metric.

Retail turns positive Retail gained 8,000 jobs in June, after losing 7,000 jobs for the fourth consecutive month in May. That followed losses of 4,000 jobs in April, 40,000 in March and 29,000 jobs in February.

Temps remain positive For the sixth consecutive month, temporary employees grew: by 13,000 in June, 17,000 in May, 2,000 in April, 13,000 in March, 10,000 in February and 15,000 in January. Temps are an important leading indicator of employment growth, so this trend is encouraging for July and beyond.

Leisure grows This economically sensitive category added 36,000 jobs in June, 25,000 in May and 60,000 in April (its highest level in a year). That’s up sharply from only 11,000 jobs in March, 33,000 in February and 15,000 in January.

Education & health steady eddy again These two categories adding 45,000 jobs, after adding 35,000 jobs in May, 45,000 in April, 16,000 in March and a whopping 66,000 in February.

JOLTS hits record high The Job Openings and Labor Turnover Survey (JOLTS) measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends. Job openings rose to a record high of 6.044 million in April (the most recent data available) versus an upwardly revised 5.785 million in March. This corresponds with the results of the April jobs report, which were solid, with hotels and restaurants experiencing the highest amount of openings. The hires rate slipped to 3.5% from 3.6%, but the quits and layoff rates were unchanged at 2.1% and 1.1%, respectively. The report continues to show a mismatch between employers looking for workers and not finding ones with the right skills and abilities for the jobs.

Challenger layoffs decline again The jobs-cut data from Challenger, Gray & Christmas typically fluctuates, but the big preliminary jump of 51,700 layoffs in May, a 41% increase from April’s 36,600, was significantly revised down to only 33,100. So June’s 31,100 layoffs represent a 6% month-over-month decline and a sharp 19% y/y drop in the pace of layoffs.