This week’s note will begin by reiterating our bullish theme on the Natural Gas market. We hav...
Strong June Jobs Report: Workers Came Off the Sidelines
07/09/2018 3:00 pm EST
The private sector payrolls survey showed 177,000 jobs were created in June, missed 190,000 estimates. The May report was revised from 178,000 to 189,000. There’s not much to worry about from this June ADP jobs report, but some economists still do, writes Don Kaufman.
This is the 4th straight report with under 200,000 jobs created. The issue economists are worried about is there aren’t enough workers available to do the jobs which are being created. This is incorrect in my view because of the low prime age labor participation rate. We’ll look into that when I review the June BLS report.
Mid-sized businesses did the best as they added 80,000 jobs. Large firms added 69,000 jobs and small firms added 29,000 jobs. Very small businesses with 1-19 employees added 16,000 jobs.
Goods producing jobs were disappointing as they only added 29,000 jobs. Only 12,000 manufacturing jobs being created isn’t consistent with the strong ISM manufacturing report. Only 5,000 natural resources and mining jobs being created isn’t consistent with the strength in energy prices.
The service sector added 148,000 jobs. The sector was led by healthcare and education which added 46,000 jobs. The supposedly extremely tight trade, transportation and utilities labor market added 24,000 jobs.
Very strong BLS report
The slight weakness in the ADP report wasn’t consistent with the very strong June BLS report. The worries about the ADP report weren’t confirmed by the BLS report as it showed 213,000 jobs were created. This beat estimates for 190,000 jobs created. Also, manufacturing wasn’t weak like the ADP report indicated as it added 36,000 jobs which doubled the highest estimate on Wall Street.
The chart below shows there needs to be job growth of about 93,000 to keep pace with population increases. Because job growth is more than double this pace, it’s safe to say the labor market isn’t close to being at full employment. This is great news as it means the bull market and expansion still have at least a couple quarters left before recession fears gain traction. The unemployment rate rose from 3.8% to 4.0%.
Workers coming off the sidelines
One great timing indicator for the economy is looking at the year over year unemployment rate. However, every indicator needs context. This was a great report as the only reason the unemployment rate went up is because the number of unemployed people looking for a job soared from 6.065 million to 6.564 million.
This is good news because it means the labor market is so great people are coming off the sidelines and are looking for a job. These people who were thought to be distant from the labor market are allowing the jobs market to continue growing above the population rate even though this expansion has gone on for over 9 years.
This increase in new people looking for a job pushed up the labor force participation rate from 62.7% to 62.9%. It beat the high end of the consensus for 62.8%.
Economists continue to be surprised about how many workers are coming off the sidelines. This is anecdotal, but the non-establishment politicians doing well in the 2016 presidential election signaled to me the economy wasn’t working for millions of Americans, meaning they didn’t have the job they desired. In November 2016, 30.7% more people thought the country was on the wrong track than thought the country was on the right track. There is a political bent to that poll, but it’s also related to the low prime-age labor force participation rate.
The latest polls show 12.8% more people think the country is headed in the wrong direction than think it’s on the right track. This shows improvement, but there’s still room to get better.
Prime age participation rate signals slack in the labor market
The prime age labor force participation rate fell from 82.2% in February to 81.8% in May. I thought that was good news because it means the labor market still has slack to improve without getting tight.
Along with the overall labor participation rate, the prime age labor participation rate increased from 81.8% to 82% in June. Based on the past three cycles, I expect the participation rate to get to at least 83% by the end of the cycle.
The rate only started increasing in Q4 2015 which is remarkable since the expansion started 6 years prior. In the 1990s expansion, the rate started increasing about 3 years after the 1990-1991 recession. The rate barely increased after the 2001 recession because that was a short expansion.
The rate went from 81.2% in January 2016 to 81.8% in January 2018. At that pace, the labor market won’t be tight until mid-2021. That is only a rough estimate of the labor market. There can be other catalysts for a recession such as economic weakness in international countries and a trade war.
One of the headlines from this report was that the average hourly wage growth was weak since it was 0.2% month over month which missed estimates by 0.1% and 2.7% year over year which missed estimates by 0.1%. If you look at this indicator, you’re very confused about where the wage growth is since the unemployment rate is 4%. There’s two problems with that thinking.
Firstly, the labor market isn’t full since the prime age participation rate is low.
Secondly, wage growth isn’t disappointing when you look at weekly earnings growth.
The average workweek was 34.5 hours which met the consensus. This translated into 3% weekly wage growth which is almost the same as May’s growth. This was one of the fastest nominal wage growth reports in this cycle, so it’s naïve to worry about nominal wage growth.
I’m more concerned with real wage growth because in Q1 2018, real wage growth was down 28 basis points year over year. If CPI increases in the next few months, which it should, real wage growth might get worse.
View a brief video interview with Don Kaufman on volatility for traders and investors here
Recorded at TradersExpo New York Feb. 25, 2018
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