The March NFP report was a bit surprising, to say the least. A net 98,000 new jobs was about half the expectation, below trend, and for some, a sign of stalling labor market recovery. The silver lining, and a point I hope to make here, is that creation of new jobs is not the story. The story is hiring, participation and unemployment, and all three are strong.
Why The NFP Doesn't Matter
The JOLTs report has been running at/near all-time highs for well over a year, just shy of 5.75 million openings monthly. The job openings rate, the number of openings as a percentage of total employment, is running just shy of 4% and at all-time highs. This shows that there are plenty of jobs currently available, precluding the "need" for new job creation.
Data from Challenger, Gray & Christmas echoes this sentiment. Their monthly report on lay-offs shows that the pace of job destruction is trending lower than in 2016, and that the pace of hiring hit a new high. Hiring in the first quarter of 2017 is the highest first-quarter total on record and the biggest quarterly gain ex-third quarter (when seasonal hiring is at a peak). This shows a rebound in hiring and employment levels not accounted for by "job creation".
(Source: Challenger, Gray & Christmas)
Weekly jobless claims figures agree with the idea of declining lay-offs and increased hiring. The initial and continuing claims figures - those filing for a first or second week of unemployment - are trending at 43-year lows. The total number of claims is in a long-term downtrend and is expected to hit new lows on a seasonal basis later this year.
(Source: Author's own work)
The unemployment level fell to 4.5%, well ahead of expectations, as more and more people go to work and current jobs are filled. This is the lowest level of unemployment since before the Great Recession and is approaching a 16-year low. This number confirms my conclusion that people are getting hired despite a lack of new job creation.
Labor participation has been an issue until recently, but the data shows a stabilization and resurgence in that as well. The LPR is holding steady at the top of its 3-year range at 63%, while the labor force has crept up to hit a record all-time high. This means not only is the percentage of workers relative to the possible workforce getting larger, but the workforce itself is expanding, making gains in LPR that much more important. It also negates the argument that unemployment levels are falling because people are leaving the workforce.
Now, touching on the JOLTs report again, the number of job separations, specifically the quits rate, indicates a high level of worker confidence. The quits rate has been running at 2.2%, just over 3.1 million, and near all-time highs for over a year. A high level of quits is indicative of the fact that employees are confident of finding new, better work and is not a sign of deterioration, instability or weakness in the labor markets.
If all this is not enough to convince a person that the labor markets are coming to a boil, let's take a look at the KC Fed's Labor Market Conditions Index. The LMCI is a diffusion index of 24 labor market indicators, including the NFP, weekly jobless rates, unemployment, job openings and more. Basically, it is the aggregate of all the indicators used by the Federal Reserve Board.
The LMCI activity index held steady in the past month, but is trending in positive territory and at 10-year highs. The index recently (about 18 months ago) crossed above 0 for the first since the Great Recession, and that is indicative of the onset of accelerating economic expansions. The momentum index increased to hit the highest level on record and is a sign of underlying strength within the US economy.
(Source: KC Federal Reserve)
Within the report, the top five factors contributing to the rise in activity over the past 6 months include 2 measures of job availability, the number of firms planning to increase employment and the number of firms with jobs they can't fill. All indications of ample job supply. The top five contributors to momentum include the same 2 measures of expected availability, the initial claims data, the labor force participation rate and the employment portion of the Manufacturing ISM.
ISM data shows a steady increase in employment in both services and manufacturing over the past 6 months and more. The manufacturing data shows a noticeable spike in the most recent number, indicative of resurgence in the sector.
(Source: Author's own work)
The conclusion is simple: there is a lot of activity going on in the labor market despite a tepid number of newly created jobs. It is important for us to have job creation, and we do. If job creation turned negative, that would be bad. The point is that under the current circumstances, NFP is not the indication of economic health it used to be. We just don't need to create a lot of new jobs when there are so many needing to be filled and people lining up to try and fill them.
Based on the data, it looks like there is a high number of available jobs, an expanding labor force, confidence with the labor market, accelerated hiring and positive expectations for the future. Job creation is important, but not so important that a single month of weak numbers changes the employment picture. Looking forward, I expect to see the LPR continue to edge higher, unemployment to trend near long-term lows and the labor market to continuing improving.
Final thoughts. All this labor market activity will surely help the consumer, won't it? To date, consumer spending has remained tepid, but that too is likely to change soon. A look at the hourly earnings figures tells a tale of improving consumer finances. Hourly earnings have been trending above 2.4% for most of the last year, indicative that our larger, more fully employed labor force is making more money. Sooner or later, they will start spending.
Disclosure: I am/we are long SPY, CTAS, PSEC.
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.