Orlando's Outlook: Wages and payrolls rise in mixed August jobs report

09-07-2018

Bottom line Nonfarm and private payrolls rose more strongly than expected in August by 201,000 and 204,000 jobs, respectively, while wages soared at their fastest pace in nearly a decade by 2.9% and the labor impairment rate (U-6) fell to a new 17-year low at 7.4%, as we continue to wring slack out of the labor market. But the Labor Department also revised June and July payrolls down by 50,000 and 59,000 jobs, respectively, while the household survey plunged by 423,000 jobs, the participation rate fell to 62.7% and the manufacturing sector surprisingly lost 3,000 jobs last month. As we balance out these positives and negatives, we believe the Federal Reserve remains on pace to hike interest rates by a quarter point at its next policy-setting meeting on Sept. 26.

Nonfarm payrolls a positive surprise The Bureau of Labor Statistics (BLS) reported a gain of 201,000 jobs in August, somewhat above the Bloomberg consensus of 190,000 jobs and Federated’s estimate of 195,000. But it revised June and July sharply lower by a combined 50,000 jobs. June was revised down from a preliminary increase of 213,000 jobs, to a revised gain of 248,000 last month, to a final gain back down to 208,000 this morning. July was revised down from a soft preliminary gain of 157,000 jobs last month to an even weaker 147,000 this morning.

Over the past seven years, August has been the statistically quirkiest month of the year for the labor market, as the flash report has missed consensus by an average of 43,000 jobs, only to be revised higher by an average of 63,000 over the next two months. So perhaps these trends—related to vacations, school holidays and manufacturing furloughs—impacted payrolls earlier than usual this summer.

Government hiring fell by 3,000 jobs This was paced by modest declines of 2,000 jobs at the local government level and 1,000 at the state level, while federal payrolls remained unchanged (private payrolls gained 204,000).

Household survey plunges The admittedly volatile household survey lost 423,000 jobs in August, compared with a powerful gain of 389,000 in July, a moderate gain of 102,000 in June, and another strong gain of 293,000 in May. This leading indicator for nonfarm and private payrolls serves as the basis for the unemployment rate (U-3).

Unemployment rate flat, while labor-impairment and participation rates decline The civilian labor force plunged by 469,000 people in August, compared with gains of 105,000 in July and 601,000 in June. That drove the labor force participation rate (the share of working-age people in the labor force) down to 62.7% in August from 62.9% in both July and June. That’s below a 4-year high of 63% in February, but above a 41-year low of 62.3% set in September 2015.

Despite a sharp decline of 423,000 people in the household survey in August (compared with a powerful gain of 389,000 in July), the number of unemployed still declined by 46,000 people in August (versus a decline of 284,000 in July). That was unable to budge the unemployment rate, however, which is now stuck at 3.9% in both August and July, down from 4% in June. May hit a 49-year low of 3.8%.

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—slipped to 7.4% in August. That marks a 17-year low, down from 7.5% in July and from 7.8% in June.

Wages soar, but hours worked flat Average hourly earnings leapt 0.4% on a month-over-month (m/m) basis in August, a tick higher than July’s 0.3% gain and twice the 0.2% bump that was expected. That translates into a year-over-year (y/y) gain of 2.9% in August, the strongest increase since April 2009. For the second consecutive month and the sixth time in the past seven months, the average private work week for all employees was flat at 34.5 hours worked in August. This metric is important, as a change of 0.1 hour worked theoretically adds or subtracts 350,000 jobs to the economy.

Manufacturing weak, construction strong The manufacturing sector uncharacteristically stumbled, losing 3,000 jobs in August, after adding a downwardly revised 18,000 in July (preliminary gain of 37,000), 21,000 in June (revised lower from 33,000) and 23,000 in May. Perhaps summer furloughs to retool plants and rationalize auto inventory levels contributed to these disappointing metrics. Although housing remains disappointing, construction added 23,000 jobs in August, 18,000 in July, and 8,000 in June, compared with 30,000 in May and 67,000 in February.

Temps solid, retail soft, but transportation strong Temporary help (a leading economic indicator) added 10,000 jobs in August, compared with a downwardly revised gain of 11,000 in July (preliminary gain of 28,000), up from losses of 7,000 in June and 1,000 in May. Retail remains in the doldrums, losing 6,000 jobs in August, down from a modest gain of 4,000 in July, versus a downwardly revised loss of 42,000 in June, perhaps related to the Toys “R” Us closure. We’ve been expecting a solid “Back-to-School” retail season this summer, so perhaps the job gains in transportation, which added 20,000 jobs in August, on the heels of gains of 7,000 in July and 15,000 in June, suggest there was a powerful mix shift towards online selling.

Strong claims and soft ADP Initial weekly unemployment claims for the week that ended Sept. 1 plummeted to 203,000, which is a new 49-year cycle low. ADP, however, added a much weaker-than-expected 163,000 workers in August, which is a 10-month low, compared with a stronger-than-expected gain of 217,000 private jobs in July, which was a 5-month high. Only 13% of ADP’s jobs in August came from small-sized companies versus 27% in July, which could be a troubling sign. 

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