U.S. Employment Market Shows Solid Progress By All Measures

by: Tim Worstall

The various possible ways of measuring the US employment situation are all looking pretty solid.

There's nothing here indicating a coming recession or slowdown.

Thus the only likely problem we can see is Trump on trade.

U.S. Employment

There are a number of ways we can measure employment in the US. Each gives us a slightly different view of what's going on and as long as they're all pointing roughly the same way then we can conclude that the picture we're getting is the right one. When signals conflict then we've got to worry about which one is wrong and why.

We're also intensely interested in that employment situation for that's our best signal of any looming recession or inflation about to come down the pike. We're not seeing signals of either thus we can and should say that the situation is generally solid.

For us as investors this is more a matter of relief at knowing that something isn't going to go wrong than anything else. Our finest plans can be derailed by the entire economy going off a cliff. But of course it not tumbling over doesn't tell us exactly which plan is still going to work.

Jobless Claims

Jobless claims is not the number of people newly unemployed - it's the number newly claiming unemployment insurance. So it's not people quitting jobs, nor - generally at least - people fired for cause. It's people being laid off. As such it's a useful number to see the inflow into unemployment:

In the week ending July 27, the advance figure for seasonally adjusted initial claims was 215,000, an increase of 8,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 206,000 to 207,000. The 4-week moving average was 211,500, a decrease of 1,750 from the previous week's revised average. The previous week's average was revised up by 250 from 213,000 to 213,250.

Or in chart form:

Jobless claims
(Jobless Claims from Moody's Analytics)

The last time the numbers were this low we were just recovering from the first Woodstock - the early 1970s. Worth noting that this is a number. The labour force is about twice the size now that it was then, meaning that the rate is about half what it was then.

So, we're not seeing any grand influx of people into unemployment as firms go bust or downsize.

ADP Employment Report

ADP is a payroll processor. They can sample their own workload and give us a good idea of what the jobs - as opposed to job claims - number is going to be a couple of days later. As they do each month:

ADP jobs number (ADP jobs number from ADP)

If we prefer that in text:

The labor market is healthy, but growth is slowing. In July, private sector payrolls expanded by 156,000 on net. This marks an uptick from the more sluggish growth in the second quarter but comes up short of the 193,000-job average over the past year. A moderation in growth is expected as the labor market tightens further and downside risks linger. Goods producers are struggling to find their footing, adding only 9,000 jobs in July after declines in the previous two months. Meanwhile, service providers have returned to form, adding 146,000 jobs, in line with the average over the first half of 2019.

The Real Jobs Number

The ADP number is a sampling from the private company files. The Bureau of Labor Statistics also provides a jobs number, the official one. This is, of course, also a survey. The ADP one being a good guide to the later official one but only that, a guide:

Total nonfarm payroll employment rose by 164,000 in July, and the unemployment rate was unchanged at 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in professional and technical services, health care, social assistance, and financial activities.

As you can see the specific numerals are different but the general message much the same. Decent jobs growth, largely in services. Or, in chart form:

Employment numbers
(US employment numbers, BLS via Moody's Analytics)

That puts matters into recent perspective.

The labor market continued to perform solidly in July. Payroll gains aligned with expectations, rising by 164,000 though the gains for June were revised downward from a net addition of 224,000 jobs to 193,000. The unemployment rate was unchanged at 3.7%, slightly above the cyclical low of 3.6%. Overall, the labor market expansion has shifted down this year but is still impressive given that it is in its 10th year of uninterrupted growth.

Quite so, it's a decent and solid performance

But What About Wages And Cost Of Employment?

If we can put recessionary worries aside, because there aren't mass firings and job creation continues apace, then what about the cost of employing people? Are we at the point where we start to get wage led inflation?

The worry of this being that if we are then the Federal Reserve will induce a recession through interest rate rises to kill said inflation.

Long story short, no, we're not:

Compensation costs for civilian workers increased 0.6 percent, seasonally adjusted, for the 3-month period ending in June 2019, the U.S. Bureau of Labor Statistics reported today. Wages and salaries increased 0.7 percent and benefit costs increased 0.5 percent from March 2019.

Or, in chart form:

Compensation costs
(Compensation, BLS via Moody's Analytics)

This is a slightly difficult number for of course we'd just love to see wages going up, the workers becoming better off. But we'd also rather it didn't happen too fast as that would mean the Fed pulling the punch bowl and declaring the party over.

Here we're seeing compensation costs - which is the important number economically, not wages - rising at about the same speed as productivity. Which is great, that means, in theory at least, that this can continue forever.

My View

As ever we're trying to work out when that party will stop. Either because the economic expansion simply ends or because the Fed causes it to end from worry about inflation. Looking at our employment numbers we don't see any sign of the recession just arriving. Employment keeps rising at a reasonable rate. There's no burst of laying people off in the jobless claims. Employment costs are rising at around productivity rises, meaning that we've not got any inflationary increases going on.

To be frank, looks like we're golden. Sure, we can wish for a bit more here and there but this is about as good as economies get - without there being an unsustainable boom that is.

The Investor Takeaway

As above, our worry is that we're to have a recession. Either induced by the Fed or just simply happening from the old age of the expansion. There's nothing we can see that indicates this. Thus we should expect no great change in policy nor general economic conditions.

Another way of putting this is that there are no great macroeconomic trades at present. We're left with having to look at microeconomic factors - the prospects for a particular technology or firm. The other way of looking at the same point is that we can structure our investing plans without having to worry that the entire economy is about to go kablooie on us.

The only thing we've got to worry about, other than specific company issues, is Trump on Trade. But then that's long been true and is not all that predictable.

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.