May Jobs Report Is Not Just Burgers And Fries

by: Marco Mazzocco, CFA
Summary

Review of May jobs report and misreporting by mainstream financial media.

A look at the industries creating jobs and the significance of the actual dollar amount of earnings created by them.

Economic justification for focus to be on services jobs versus manufacturing.

"Would you like fries with that?" is a phrase used sometimes by people to mock a low paying services job. While using a phrase like that really says more about the person using it than it does the focus of the phrase, it does a great job capturing the ease with which people discount overall services labor.

On Friday we got the May nonfarm payroll report which came in at a much stronger than expected headline number of 280,000 jobs created with labor force participation and unemployment rates essentially unchanged. And almost as quickly as the bond market sold off, out came the usual journalists and other naysayers who cling to the misguided perception that job creation is in all low paying services jobs. Take, for example, Jeff Cox from CNBC and this article "Fast food nation : What's driving the jobs numbers" where he cites the 57,000 leisure and hospitality jobs as being representative of the overall report and a reason for the Fed to stick with ZIRP. What Jeff doesn't cite are the 63,000 jobs created in Professional and business services or the 74,000 jobs created in Education and health services. That would make Leisure and hospitality jobs the third largest category for gains, not the second as Jeff's article says. But hey, why let facts get in the way of an easy story. What I'm going to do here is breakdown Friday's report and really look at the jobs being created and more importantly, the actual dollar value they are bringing to the table. Let's start with the top five industries for job gains in the May report:

Just looking at that, people might be concerned that a large amount of jobs being created are in the Leisure and hospitalities industry. Now, let's look at the data taking into account labor force size and average earnings (excluding government jobs).

Major points from the table:

  1. Professional and business Services (PBS) and Education and health services (EDH) represent 40% of aggregate earnings.
  2. Manufacturing ((MFCT) represents just 13% of aggregate earnings which goes along with exports being roughly just 13.5% of GDP.
  3. Mining and logging which includes the Oil and gas industry counts for a minute percentage of the overall labor force. This tells me why we haven't seen the energy sector job losses show up in claims data.

As you can see, Professional and business services is generating the most earnings (Total Earnings = Number of Employees x Average Weekly Wages). PBS is also ranked second in job growth in May and has been a top gainer all year. What exactly is PBS you might ask? PBS is a supersector made up of 3 subsectors which are:

  1. Professional, Scientific, and Technical Services
  2. Management of Companies and Enterprises
  3. Administrative and Support and Waste Management and Remediations Service.

Basically PBS runs the gamut from lawyers, accountants, architects, engineers, CEO's and your local custodial arts person. Many people like to discount PBS and make the argument that the loss of manufacturing jobs has been a drag on the economy, but as you can see in the below chart it has not. Clearly PBS is the workhorse of the economy.

This data also plays into why the Markit and ISM services reports are so important. The most recent Markit release from June 3rd came in at a healthy 56.2 with payroll numbers and business optimism both increasing. The ISM report released the same day reflected the same upward trend. Historically speaking, anything in the mid 50's on diffusion indices is a healthy range signaling expansion. When we look at the job creation in services, the percentage of labor force earnings that services represent and the nearly all time low level of unemployment claims, we clearly have a healthy labor market.

I think it's easy for people to get hung up on the importance of manufacturing jobs because of the familiarity manufacturing has. America used to be all about steel mills, car factories and other labor intensive industries. Facts are, times have changed and lots of work boots have been exchanged for loafers and heels. Not to say American manufacturing is dead because we will always have local production of some goods, but comparative advantage allocates resources and production to the most economic places.

The point of all this is to say that the labor market and the overall economy is much healthier than most people in financial media say. So the next time you hear someone bemoan the loss of manufacturing jobs and discount the growth in services, you can ask them "Would you like some research with that?"

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.