Orlando's Outlook: Treading water
Bottom Line Our current economic soft patch here in the U.S.—combined with the eurozone’s recession, decelerating growth in several of the key emerging-market economies and continued fiscal-policy uncertainty in Washington—have collaborated for the third consecutive month to capsize yet another labor report. For the glass-half-full crowd, however, this June report, while certainly disappointing, was not an unmitigated disaster, with wages and hours-worked ticking higher, and with improving leading indicators such as the ADP report and temporary hiring. In addition, we continue to believe that lower energy prices and interest rates and rising stock prices will likely spark renewed momentum in both consumer spending and manufacturing by quarter’s end. Moreover, from a monetary policy standpoint, we’ve gotten exactly what we expected from the Federal Reserve last month and from the central banks of England, China and Europe yesterday, which we believe will collectively help to boost economic growth prospects before year end. If we’re right, then June’s domestic labor market—which is clearly treading water right now—should begin to demonstrate a firmer tone as we move through the third quarter.
Another sloppy month for nonfarm payrolls June rose by only 80,000 jobs, well below consensus estimates for a gain of 100,000 jobs, and the Bureau of Labor Statistics (BLS) only slightly revised April and May results down by 1,000 jobs. April’s preliminary gain of 115,000 nonfarm jobs, which was gutted to a gain of only 77,000 jobs last month, was revised down again to a final gain of 68,000. May’s preliminary gain of 69,000 jobs was revised up to a gain of 77,000. So the average monthly gain over the past three months was only 75,000 jobs, which is a tiny fraction of the 252,000 monthly average set during December, January and February.
Private payrolls no better Private payrolls grew by only 84,000 in June, down from the consensus forecast for a gain of 106,000 jobs, while the BLS collectively revised April and May results up by 21,000 jobs. Despite what we heard from the Obama administration recently about how robust job creation is in the private sector, this was the private sector’s weakest reading in 10 months. April’s preliminary increase of 130,000 jobs, which was revised sharply lower last month to a gain of only 87,000 jobs, was revised down again to a final gain of 85,000 jobs. May’s preliminary increase of 82,000 jobs was actually revised up to a gain of 105,000. So the average monthly gain during April, May and June of only 91,000 private jobs represents the worst quarter for corporate hiring since the first three months of 2010, which was also significantly lower than the average gain of 255,000 jobs registered during December, January and February.
Household survey stays afloat The household survey gained 128,000 jobs in June, down sharply from the healthy increase of 422,000 jobs in May, but at least it stayed positive. The household survey had lost 169,000 jobs in April and 31,000 jobs in March, after posting an average monthly gain of 484,000 jobs during December, January and February. Because the household survey is an important leading employment indicator for both nonfarm and private payroll employment, we’re going to watch the direction of the next few months closely.
ADP rebounds This important proxy for private payroll growth leapt to a much stronger-than-expected gain of 176,000 jobs in June, up from 136,000 jobs in May and only 112,000 jobs in April. By comparison, ADP had reported much stronger gains of 204,000 jobs in March, 228,000 in February and 182,000 in January for a three-month average of 205,000 jobs, so perhaps we’re starting to see a positive inflection point. Importantly, ADP reported that in June, 93,000 jobs came from small firms, compared with 67,000 jobs in May; 72,000 jobs came from mid-sized companies, versus 58,000 in May; and only 11,000 jobs from larger companies, which is unchanged from the prior month. This is consistent with the outsized pace of job growth we’ve seen among small- and mid-sized businesses, which remain the engine of job creation here in the U.S. The government’s official nonfarm establishment survey eventually captures this trend in job creation with a lag of several months, which is why ADP remains an important leading employment indicator for us.
Temps grind higher Temporary help, another important leading indicator of employment growth, added 25,000 jobs in June, compared with upwardly revised gains of 19,000 jobs in May and 21,000 jobs in April and a loss of 13,000 jobs in March. That compares with much stronger gains of 50,000 jobs in February and 36,000 jobs in January.
Spike in initial weekly jobless claims may have peaked Another important leading employment and economic indicator, weekly claims surged to 392,000 for the week ended June 16, which was the inopportune survey week for the June employment report. By comparison, weekly claims had troughed at 351,000 in mid February, so that represents a sizable reversal over the past four months, consistent with the horrific employment trends we witnessed during the recently completed second quarter. But over the last two weeks, claims have plunged to 374,000, so perhaps we’re starting to see an inflection point here, too.
Construction and manufacturing gain Construction gained a modest 2,000 jobs in June, but that’s a significant improvement over downwardly revised losses of 35,000 jobs in May, 7,000 jobs in April and 14,000 jobs in March. That contrasts with a muted loss of only 1,000 jobs in February and solid gains of 18,000 and 26,000 jobs, respectively, in January and December, so perhaps we’re getting back on track. Manufacturing added 11,000 jobs in June, but employment in this area remains tepid, compared with 9,000 jobs in May, 10,000 jobs in April, 41,000 jobs in March, 30,000 jobs in February and 52,000 jobs in January.
Government job losses slow The difference between private and nonfarm payroll gains in June was the loss of 4,000 federal, state and local government jobs, compared with losses of 28,000 jobs in May, 17,000 jobs in April and 4,000 in March. The government had actually added 5,000 jobs in February, after a modest loss of 2,000 jobs in January.
Unemployment & participation rates flat, U6 rises Unemployment, which remained unchanged for the second consecutive month at 8.2% in June, has now consistently exceeded 8.0% since February 2009, the longest such stretch of joblessness since government record-keeping began in 1948. Meanwhile, the labor impairment rate—also known as the “total” (U6) rate of unemployment, which more broadly includes discouraged workers and the underemployed—ticked up to 14.9% in June from 14.5% in both April and March. The labor force participation rate held steady at 63.8% in June, from a 30-year cycle low of 63.6% in April. The participation rate had been as high as 65.7% when the Great Recession ended in June 2009, but the combination of a sharp increase in discouraged workers—due to an education and skills mismatch and a lack of housing mobility—and the structural retirement of younger working women and aging baby boomers from the labor force, has caused this metric to plunge, dragging along with it the unemployment rate.
Wages and private hours worked increase Average hourly earnings ticked up in June to a 0.3% monthly increase, which boosts year-over-year wage gains by 2.0% last month, versus a 1.8% increase in May. The average private work week for all employees ticked up to 34.5 hours in June, which is good news along with the wage gains, because each increase of 0.1 hour worked is the equivalent of adding an estimated 400,000 jobs to the economy.