Orlando's Outlook: Employment cycle starting to firm
Bottom Line After a dismal second quarter, job creation began to firm in July, posting its strongest month since February with a well-above-consensus print of 163,000 nonfarm jobs. While this strong showing was consistent with the positive leading indicators we identified last month, we caution that it’s not yet time to don the party hats and cork the champagne, as the details within this month’s report were decidedly mixed. On the positive side of the ledger, the ADP report, initial weekly jobless claims, and manufacturing and temporary hiring levels were all encouraging. But household employment and government hiring were both negative, hours worked and wages were essentially flat, and the rate of unemployment ticked up to 8.3%, its highest level in five months. Nevertheless, we continue to believe that lower energy prices and interest rates, a growing wealth effect from rising equity and housing prices, improved second-half consumer spending trends, and aggressive coordinated global central bank policy intervention will collectively prod the labor market here to grind higher into year end.
A positive surprise for nonfarm payrolls July leapt by 163,000 jobs, which was well above consensus estimates for a gain of 100,000 jobs, although roughly in line with our own forecast here at Federated, which was for a gain of 160,000 jobs. The Bureau of Labor Statistics (BLS) only slightly revised May and June results down by 6,000 jobs. May’s preliminary gain of 69,000 jobs, which was revised up to a gain of 77,000 last month, was revised up again to a final gain of 87,000. June’s preliminary gain of 80,000 nonfarm jobs was revised down sharply to a gain of only 64,000 jobs. So the revised average monthly employment gain during the second quarter was only 73,000 jobs, which is well below the 252,000 monthly average set during December, January and February. But July results were more than double both June and the second-quarter average, which suggests that job creation may be slowly getting back on track.
Private payrolls tag along Private payrolls rose by 172,000 in July, well above the consensus forecast for a gain of 110,000 jobs, while the BLS collectively netted out revisions for May and June. May’s preliminary increase of 82,000 jobs, which was revised up to a gain of 105,000 last month, was revised up again to a final gain of 116,000 jobs. June’s preliminary increase of 84,000 jobs was revised down to a gain of only 73,000 jobs. So the average monthly gain during the second quarter was unrevised at only 91,000 private jobs, which still represents the weakest quarter for corporate hiring since the first three months of 2010. That compares with the average gain of 255,000 jobs added during December, January and February. As a result, private job creation in July was also roughly double that of June and the second-quarter’s average pace.
Household survey turns negative In what is clearly the most troublesome aspect of the July report, the household survey actually lost 195,000 jobs last month, compared with gains of 128,000 jobs in June and 422,000 jobs in May. In contrast, 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. The household survey, which has been extremely choppy over the past eight months, remains an important leading employment indicator for both nonfarm and private payroll employment, so its manic behavior certainly tempers our enthusiasm for the other more constructive components of the July report.
ADP surprisingly solid This important proxy for private payroll growth was much stronger than expected with gain of 163,000 jobs in July, down slightly from a gain of 172,000 jobs in June. Importantly, ADP results the past two months are solidly above more modest gains of 131,000 jobs in May and only 112,000 jobs in April. In contrast, ADP had reported a much stronger average gain during the first quarter of 205,000 jobs, so perhaps we’re starting to see a positive inflection point. Importantly, ADP reported that in July, 73,000 jobs came from small firms, compared with 91,000 jobs in June; 67,000 jobs came from mid-sized companies, versus 69,000 in June; and 23,000 jobs came from larger companies, roughly double the pace of 12,000 and 10,000 new jobs created in June and May, respectively, and well above the miniscule 1,000 jobs added in April. While this is altogether consistent with the outsized pace of job growth we’ve typically seen among small- and mid-sized businesses, which are the engine of job creation here in the U.S., we’re encouraged by the much-improved pace of job creation from larger companies. ADP remains an important leading employment indicator for us, because the government’s official nonfarm establishment survey eventually captures this outsized trend in job creation from small- and mid-sized companies with a lag of several months.
Initial weekly jobless claims improving Another important leading employment and economic indicator, weekly claims came in at 365,000 for the week ended July 28, down significantly from the recent cycle peak of 392,000 for the week ended June 16. July tends to be volatile due to auto-industry furloughs related to plant retoolings, and claims had troughed at 352,000 the week ended July 7. So the smoother four-week moving average for July is now at 365,500, which—at 20,000 below June levels—suggests that the improvement in non-farm payrolls we saw in July could continue to grind higher in coming months.
Temps continue to grind higher Temporary help, which is another important leading indicator of employment growth, rose for the fourth consecutive month, adding 14,000 jobs in July, compared with gains of 21,000 jobs in June, 15,000 jobs in May and 21,000 jobs in April. Temporary hiring had actually lost 13,000 jobs in March. That compares with much stronger gains of 50,000 jobs in February and 36,000 jobs in January.
Manufacturing strong, construction weak Auto-related strength fueled a surge in manufacturing hiring in July, adding a much stronger-than-expected 25,000 jobs last month, compared with only 10,000 new jobs in June, 13,000 jobs in May and 10,000 jobs in April. Contrast that with relatively robust first-quarter job creation, in which manufacturing adding an average of 41,000 jobs per month. Construction, however, lost 1,000 jobs in July, after gaining 4,000 jobs in June. That compares with job losses of 32,000 in May, 7,000 in April, 14,000 in March, and 1,000 in February. Back in January and December, however, construction had enjoyed solid gains of 18,000 and 26,000 jobs, respectively.
Government continues to bleed jobs The difference between private and non-farm payroll gains in July was the loss of 9,000 federal, state and local government jobs, compared with a like number of job losses in June, and losses of 29,000 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. So government is still going through the process of right-sizing its labor force.
Unemployment and U6 rise, participation rate falls This is the worst possible combination. Due to 195,000 lost household jobs, the rate of unemployment, which ticked up to 8.3% in July to a five-month high, has now consistently exceeded the 8.0% level for 42 consecutive months, marking 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 15.0% in July. Finally, the labor force participation rate ticked down to 63.7% in July, which is just above its 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 are flattish Average hourly earnings rose in July by only 0.1%, compared with a more robust 0.3% gain in June, which boosts year-over-year wage gains by 1.7% last month, versus a 2.0% increase in June. The average private work week for all employees was flat at 34.5 hours in July, which is disappointing, because each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 400,000 jobs to or from the economy.
