August Jobs And September Increases?

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Summary

  • The August jobs report did little to settle the Fed's long-standing impasse regarding a second uptick in the Federal Funds rate.
  • Wage growth fell slightly to 2.43% for August. The shift from higher paying goods to lower paying service-jobs continues apace.
  • The unemployment rate remains critical to the Fed's view on inflation, despite the Phillip's Curve's historical predictive shortcomings which overly heightens the importance and influence of the jobs reports.

Private sector non-farm payroll job creation for August came to 126,000 while the public sector added another 25,000 for a total of 151,000 jobs created for the month. The total is somewhat less than the 180,000 consensus estimate and with the May outlier of just 24,000 jobs created falling off of the 3-month calculation, August's 3-month average increases to 232,000. For the year, the average monthly jobs creation remains largely the same at 187,000 through August compared with 186,000 through July. Sadly, the much-heralded report did little to settle the Fed's long-standing impasse regarding a second uptick since 2006 in the Federal Funds rate. The national unemployment rate remained unchanged at 4.9%.

The civilian labor force added 176,000 while 58,000 fell out of the labor force during the month. Ninety-seven thousand workers were added to private sector payrolls while the ranks of the unemployed grew by 79,000 during the month. Both the labor participation (62.8%) and employment to population ratios (59.7%) remained largely unchanged. Highlights of the report are as follows:

  • Part-time for economic reasons increased 113,000 for the month but little changed at 6.1 million. Total part-time employment as a percentage of total employment was 21.3% for the month, little changed from July and little changed from the 21.68% posted in August 2015;
  • Unemployed for less than 5 weeks gained 130,000 during the month while long-term unemployed dropped 14,000;
  • Goods producers lost 24,000 with manufacturing (down 14,000), durable goods (down 16,000) and motor vehicles (down 5,600) leading the decline. Service providers added 150,000 positions as the shift from goods to services continues. Retail (up 15,000), transportation and warehousing (up 14,900), professional and business services (up 22,000), education and health services (up 39,000), healthcare and social assistance (up 36,000), leisure and hospitality (up 29,000) and financial services (up 15,000) all drove service positions up during the month;
  • Private sector hours fell 0.2% during the month to 34.3 and down 0.87% YOY;
  • Long-term unemployment largely remained the same with a monthly uptick to 9.7% from 9.6% in August but down from 10.3% YOY;
  • Revisions to June lopped 21,000 jobs off the month's total while an upward revision to July's total added 20,000 to the month for a net decline of 1,000 positions to the year's overall total.

Figure 1: Private Sector Wage Growth through August 2015

Industrial Sector

Number of Private Sector Employees (thousands)

Percent Change of Employees YOY

Percent of Private Sector Work Force

August 2015 Hourly Wage

August 2016 Hourly Wage

YOY Percent Growth

Goods Producing

19,600

0.19%

16%

$26.33

$26.96

2.39%

Mining/Logging

679

-15.44%

0.057%

$31.44

$31.68

0.76%

Construction

6,640

3.09%

5%

$27.46

$28.22

2.77%

Manufacturing

12,281

-0.30%

10%

$25.40

$26.03

2.48%

Service Producing

102,785

2.23%

84%

$24.83

$25.45

2.50%

Wholesale Trade

5,926

0.80%

5%

$28.79

$29.64

2.95%

Retail Trade

15,968

1.87%

13%

$17.56

$17.92

2.05%

Transport/Warehouse

4,913

1.05%

4%

$22.86

$23.50

2.80%

Utilities

564

0.61%

0.005%

$37.54

$38.75

3.22%

Information

2,872

1.05%

2%

$35.25

$36.77

4.31%

Financial Services

8,317

2.05%

7%

$31.60

$32.49

2.82%

Professional/Business

20,284

2.75%

17%

$30.21

$30.90

2.28%

Education/Health

22,755

2.79%

19%

$25.34

$25.72

1.50%

Leisure/Hospitality

15,576

2.76%

13%

$14.39

$14.95

3.89%

Other Services

5,698

1.35%

5%

$22.56

$22.96

1.77%

Total Private

122,385

1.04%

---

$25.12

$25.73

2.43%

Private sector wage growth was up 2.43% through August as gains continued to be spread unevenly amongst the various industrial sectors (see Figure 1, above). Services outdid goods in wage growth for the month with the former coming in at 2.50% while the latter struggled to post 2.39% gains for the same period. Oil and gas companies, the biggest headwind of the goods sector, continue to lose ground. After all, Western Texas Intermediate crude hit a year-to-date low of $26.11/barrel and high of $51.23 - all in the space of four months. Job loss in the oil and gas sector has claimed 15.44% of the sector's workforce over the course of the year through August which depressed wage growth for the sector as a whole to just 0.76% for the period with the average hourly wage settling at $26.96. Goods production posted a mere 0.19% increase in its overall workforce year-over-year, a telling sign of the collapse in oil drilling and the plethora of support jobs the oil sector generates. Manufacturing jobs have been squeezed since the peak in oil prices in June of 2014 as demand for heavy machinery in the oil patch, a strong dollar, overall weak global demand and ongoing inventory correction all have weakened the demand for labor. Meanwhile, the services side has increased its worker numbers by 2.23% over the period with an average hourly wage of $25.45. Goods production accounts for just 16% of total employment, a far cry from years' past. On the flip side of this coin, service sector jobs constitute about 84% of all private sector employment.

The quarterly cost of employee wages and salary increased 2.5% through the end of the 2nd quarter year-over-year for all civilian workers, up from 2.0% through the end of the 1st quarter and up from 2.1% gain in June 2015. Private sector wages & salary compensation increased even further for the period, up 2.6% for the same period, up from 2.0% increase through the end of the 1st quarter and up from 2.2% increase in June 2015. Public sector wages and salary increased 1.7% for the period.

This brings us to the Federal Reserve part of the story. Federal Reserve Chair Janet Yellen's much anticipated speech at the close of the Jackson Hole meeting last month strongly signaled that an increase in the Federal Funds rate has become growingly possible. For the first couple of hours after the Yellen speech, stocks moved higher and bond prices moved lower. Then the bombshell hit. In a seemingly off-the-cuff remark by Vice Chair Stanley Fischer in a CNBC interview after the Yellen speech, stunned observers tried to decipher meaning from the Vice Chair's remark that the Yellen speech was consistent with not one but two rate increases in Federal Funds rate for 2016. The September FOMC meeting suddenly lurched back to renewed importance. Once again, the jobs report was thrust into the likely unwanted role of arbitrator, this time between one, possibly two rate increases for 2016.

The national unemployment rate remained unchanged at 4.9%, terribly close yet again to the widely held definition of full employment. Wage growth while uneven, is nonetheless slowly sketching out the makings of an ever so gently upwardly sloping trend line. Claims for state unemployment benefits marked their 78th consecutive week below 300,000, a streak not bettered since 1970, a time when the labor force was a good deal smaller than it is today. Yet with PCE core price inflation seemingly stuck at 1.6% through the end of the 2nd quarter, the suggestion here is the historic link between a tightening labor market and rising inflation or the so-called Phillips Curve, has somehow come unglued. This is not the first time the Phillips Curve has been tested found wanting. High inflation and high unemployment were close bedfellows in the 1970s. In the 1990s, the jobless rate and price pressures fell concurrently. Over the past several years, price inflation has declined despite a falling unemployment rate. The important takeaway here is the unemployment rate indeed lies close to the heart of the Fed's view on inflation. Meanwhile, markets continue to fight nagging uncertainty in lieu of a solution.

And then the bad economic news just went from bad to worse:

  • The Institute for Supply Managers' PMI manufacturing index dropped to a 49.4 reading in August, down significantly from a 52.6 reading in July and well below consensus estimates of 52 - a full 6% drop on the month and just over 3% on the year. A reading of 43 has historically been associated with recession. The average reading over the past twelve months is now just above contraction at 50.3 through the end of August. It got worse: New orders plunged almost 14% on the month and just over 5% on the year. Production took a similar hit with a decline of 10.47% on the month and 7.46% on the year. Input prices have dropped almost 17% since peaking in May, putting further downward pressure on inflation.
  • Worker productivity in the 2nd quarter for non-farm business declined 0.4% for the past four quarters. Output and hours worked both increased on the 2nd quarter 2015 while total compensation rose 3.7% on the quarter and 2.2% on the year. Unit labor costs soared to 4.3% on the quarter and 2.6% on the year.

The US Dollar Index (DXY) plunged 0.53% against a basket of world currencies while the interest rate sensitive spread on the 2-year/10-year notes fell to 0.83 basis points, now down 31.44% year-to-date. Internationally, both the euro and yen strengthened against the dollar to $1.1238 and $103.04, respectively, on the news before falling back. The 10-year German Bund strengthened to a yield of -0.04%. Federal Funds future probabilities for a September FOMC move on interest rates were as high as 30% prior to the PMI report, and fell back to less than 20% with the release.

US Corporate earnings growth, now boasting five, possibly six, consecutive quarterly year-over-year declines, three quarterly declines in non-residential investment and five quarterly contractions in inventory spending, will face even stiffer headwinds moving forward, as productivity and unit labor costs march resolutely in opposite directions. Add an even stronger dollar to the mix in a surprise - perhaps even destabilizing - September rate increase and corporate earnings growth will dance the good tarantella to uber - exhaustion - and then fall flat. And that's only the domestic side of the equation.

This article was written by

Douglas Adams profile picture
1.58K Followers
Douglas Adams specializes in macro-economic research and turning theory into practical portfolio applications for clients over the past seventeen years. Mr. Adams recently formed Charybdis Investments International based in High Falls, New York where he is the managing director of a fee-only investment advisory practice with clients throughout the United States. As an author, Mr. Adams has commented widely on a diverse array of topics from Brexit to monetary policy to forex to labor productivity and wage growth. He holds an undergraduate degree from the University of California, a master’s degree from the University of Washington and an MBA in finance from Syracuse University.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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