Orlando's Outlook: Dismal jobs report could push Fed to act
Bottom Line This morning’s August employment report, which was dreadful across the board, has sharply increased the odds of monetary policy action at next week’s two-day Federal Open Market Committee (FOMC) meeting. In addition, with only two months—and two last labor reports—left before the Nov. 6 presidential election, today’s report also bears important political implications. There was literally no place to hide last month, as the Bureau of Labor Statistics (BLS) reported that aside from sizable misses in August for both nonfarm and private payrolls—along with significant downward revisions for June and July—household employment, manufacturing, government and temporary help all lost jobs, wages and hours worked were unchanged from July, and the labor-force participate rate plunged to a 31-year cycle low due to a surge in discouraged workers, who have simply quit looking for jobs because they’re so disgusted with their anemic prospects.
The silver lining, in our view, is that this labor report was so pathetic that Federal Reserve Chairman Ben Bernanke now has the ammunition he needs to potentially launch a third round of quantitative easing (QE) next Wednesday and Thursday to help fulfill one of the Fed’s two mandates. Moreover, with the conventions now behind us and the debates scheduled for next month, we’re in the home stretch for the presidential election, and undecided voters will be judging critically the efficacy of President Obama’s fiscal policies as they relate to the poor employment picture. So this August labor report represents something of a win-win for investors—it was so bad, that additional monetary policy stimulus must be in the offing for next week, and a potential change in leadership in Washington brings with it the possibility of better fiscal policies next January.
Nonfarm payrolls miss August rose by a tepid 96,000 jobs, which was below consensus estimates for a gain of 130,000 jobs, and well below our own forecast here at Federated, which was for a gain of 175,000 jobs. The BLS revised June and July results down by a combined 41,000 jobs. June’s preliminary gain of 80,000 nonfarm jobs, which was revised down to a gain of only 64,000 jobs last month, was revised down again to a final gain of only 45,000 jobs. July’s preliminary gain of 163,000 jobs was revised down to a gain of 141,000. So the revised average monthly employment gain over the past five months (April through August) is only 87,000 jobs, roughly one-third of the 252,000 monthly average set during December, January and February.
Private payrolls sustain a larger miss Private payrolls rose by only 103,000 in August, well below the consensus forecast for a gain of 142,000 jobs, while the BLS collectively revised June and July down by 20,000 jobs. June’s preliminary increase of 84,000 jobs, which was revised down to a gain of only 73,000 jobs last month, was revised down again to a final gain of 63,000 jobs. July’s preliminary increase of 172,000 jobs was revised down to a gain of 162,000. So the revised average monthly gain over the past five months (April through August) is only 106,000 private jobs, less than half of the average gain of 255,000 jobs added during December, January and February.
Household survey stays negative The household survey has now lost jobs in four of the past six months, dropping another 119,000 jobs in August on top of 195,000 lost jobs in July. This compares with gains of 128,000 jobs in June and 422,000 jobs in May. But 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 is an important leading employment indicator for both nonfarm and private payroll growth, so its choppy behavior so far this year is very disconcerting.
Temps turn negative Temporary help—another important leading indicator of employment growth—lost 5,000 jobs in August, after rising for the four previous months (downwardly revised additions of 7,000 jobs in July, 18,000 in June, 15,000 in May and 21,000 in April). Temporary hiring had actually lost 13,000 jobs in March, but that compares with much stronger gains of 50,000 jobs in February and 36,000 jobs in January.
Manufacturing also negative, while construction remains weak Manufacturing suffered an abrupt about-face in August, losing 15,000 jobs after gaining 23,000 jobs in July. That compares with moderate additions of 7,000 new jobs in June, 13,000 in May and 10,000 in April. In the first-quarter, however, manufacturing averaged the addition of 41,000 jobs per month. Construction gained a modest 1,000 jobs in August, compared with no jobs added or lost in July, and 4,000 jobs added 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 lose jobs The difference between private and nonfarm payroll gains in August was the loss of 7,000 federal, state and local government jobs, compared with job losses of 21,000 in July, 18,000 in June, 29,000 in May, 17,000 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 has still not completed its right-sizing process.
Unemployment & U6 decline for the wrong reasons The media will likely trumpet the fact that unemployment, which hit a five-month high of 8.3% in July, fell to 8.1% in August, while the labor impairment (U6) rate—also known as the “total” rate of unemployment because it more broadly includes discouraged workers and the underemployed—plunged to 14.7% in August from 15.0% in July. But that improvement is a mathematical function of the fact that household employment lost 119,000 jobs in August after losing 195,000 jobs in July, while the civilian labor force plummeted by 368,000 workers in August on top of July’s loss of 150,000 due to a surge in discouraged workers who have since given up any hope of finding a positive change in the labor market. The unemployment rate has now consistently exceeded the 8.0% level for a record 43 consecutive months since February 2009, marking the longest such stretch of joblessness since government record-keeping began in 1948. In addition, the labor force participation rate fell to 63.5% in August from 63.7% in July, which represents a new 31-year cycle low. The participation rate had been as high as 65.7% when the Great Recession ended in June 2009, and that 2.2% decline over the past three years is the only reason that the rate of unemployment has fallen from 10.0% in October 2009 to 8.1% today.
Wages and private hours worked are flat Average hourly earnings in August were unchanged, compared with an expected jump of 0.2% and a more modest 0.1% gain in July. That keeps year-over-year wage gains at a disappointing 1.7% last month, the same level as in July. The average private workweek for all employees was flat at 34.4 hours in August, compared with a downwardly revised reading for July, which is disappointing, because this decline of 0.1 hour worked in July is the equivalent of subtracting an estimated 400,000 jobs from the economy.
ADP surprisingly strong The only sliver of good employment news this month was the surprisingly robust gain in the ADP report. This important proxy for private payroll growth was much stronger than expected with gain of 201,000 jobs in August, while July was revised up to a gain of 173,000 jobs versus a preliminary reading 163,000 jobs added, which is roughly even with June’s gain of 172,000 jobs. Importantly, this average gain of 182,000 jobs over the past three months is solidly above more modest gains of 131,000 jobs in May and 112,000 in April, and is approaching the much stronger average gain of 205,000 jobs added during the first quarter. ADP reported that in August, 99,000 jobs came from small firms, compared with 73,000 jobs in July; 86,000 jobs came from mid-sized companies, versus 67,000 in July; and 16,000 jobs came from larger companies, compared with 23,000 in July. This remains consistent with the outsized pace of job growth we’ve seen among small- and mid-sized businesses, which are the engine of job creation here in the U.S. 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, but with a lag of several months.
Initial weekly jobless claims improve slightly Another important leading employment and economic indicator, weekly claims posted 365,000 for the week ended Sept. 1, down significantly from the recent cycle peak of 392,000 for the week ended June 16, but elevated from the trough at 352,000 the week ended July 7. So the smoother four-week moving average is now at 371,250, which suggests that nonfarm payrolls could grind higher in coming months.