Market Has Interesting Reaction to Blowout August Jobs Report

Is it that good? Maybe not for financial markets. Is it possible that U.S. labor markets are this strong? Not likely, if one talks to the young people who I talk to. Then again, demand for labor probably was not as weak in June and July as the Bureau of Labor Statistics (BLS) made those months out to be, either. Is this just a case of more inaccurate data being published by that bureau? Very likely.

We won’t know for sure, for some time though as the BLS continues to rely on smallish sample size surveys that require a response and not upon hard data. That’s why most economists now look at the monthly ADP Employment Report as equal if not more than equal to these BLS results in terms of quality.

That Said…

These numbers are so much better than what was expected, it’s mind-blowing. The Bureau of Labor Statistics released the agency’s employment-focused survey results for the month of August on Friday morning. The results are staggering.

Non-Farm Payrolls, which will very likely be revised in coming months, printed at an increase of 162,000 positions, well above expectations for about 52,000. There were also upward revisions made to the prior two months of 55,000 jobs, leaving the number at a net gain of 217,000 hirings above where we thought we were. This data comes from the Establishment Survey (Table B).

Interestingly, the Household Survey (Table B) was even stronger, showing an increase of 569,000 employed persons for the month of August and an increase of 115,000 unemployed persons as the civilian labor force grew by 683,000 individuals. This comes after, ADP told us on Wednesday that the U.S. economy had created only 38,000 new private sector jobs in August. The Establishment Survey claims gains of 127,000 private sector jobs for the period. See how easy it is to mistrust the numbers? Economists with an agenda could literally find whatever it is they are looking for. Let’s move on.

Key Data

The Unemployment Rate, which is drawn from the Household Survey, printed at an unchanged 4.1%, below expectations for a rise to 4.2%. Participation improved from 61.4% in July to 61.6% in August. If true, that would lend legitimacy to this release. Still drawing from the Household Survey, the Employment to Population Ratio similarly improved from 58.9% to 59.1%.

This is important. The number of individuals working part-time for economic reasons decreased by 414,000 persons in January while the number of individuals working part-time for non-economic reasons decreased by 18,000 persons. That’s 432,000 fewer part-time workers and it’s from the Household Survey which is the survey claiming 569,000 jobs created. The implication? If true, more than 1 million full-time jobs were created in August. Don’t yell at me. I don’t believe it either. That is what the data implies.

That takes the U-6 unemployment rate, which we commonly refer to as the “underemployment rate” down to 7.7% from 7.9%. This metric peaked this year in April at 8.2%. Are conditions that much better than they were back in April? The average workweek for full-time workers, which is also a measure of labor market demand, printed at 34.4 hours, up from 34.3 and above expectations for 34.3. Like I said, there is very little evident weakness in this report. Maybe there is one weakness. Keep reading.

Demographics

Here is the unemployment rate along gender, ethnic background and education. Reminder: The rates are from July to August.

• Adult Men increased from 3.9% to 4.0%
• Adult Women decreased from 3.7% to 3.5%
• Teenagers increased from 12.1% to 14.1%
  
• White increased from 3.6% to 3.7%
• Black or African American decreased from 6.3% to 6.0%
• Asian decreased from 4.0% to 3.2%
• Hispanic or Latino increased from 4.6% to 4.8%
  
• High School Dropouts decreased from 5.4% to 4.7%
• High School Graduates increased sharply from 4.0% to 4.4%
• Some College/Associate Degrees increased from 3.6% to 3.7%
• Bachelor’s Degrees and more unchanged at 2.7%

Here’s the (Sort of) Weakness

Interestingly, it would appear that all of this hiring has positively impacted those who had not finished high school and literally nobody else. The implication there would be that most of the hiring, in aggregate, is in low-paying positions. For hourly wage earners, compensation showed a month-over-month gain of 0.3%, in line with expectations and up from 0.1% in July. OK. That’s not so bad. On a year-over-year basis, wages grew 3.1%, down from 3.2% in July. Still, that was better than the consensus view for growth of just 3.0%.

Markets and Policy

Here’s the deal: Fed officials with a hawkish bent will have a stronger argument in the wake of this release. I don’t think anyone was looking to cut rates, but those who would like to see the FOMC remain on hold will have to rely on the fact that BLS data is so consistently inaccurate that these numbers cannot be trusted right away.

That’s a very tough argument to make without seeming political. I say, cite the ADP data if one is less hawkish. It is far less volatile than the BLS data and based on raw numbers provided by 26 million workers, not the 120,000 businesses polled in the Establishment Survey and the paltry 60,000 households polled in the “other” survey.

Interestingly, equities, which were up ahead of this release, have pulled back. Treasury yields do not seem to know what to do. The U.S. 10-year note paid 4.75% ahead of the release. That same note paid more than 4.8% a few minutes later and now yields 4.77%. Yawn. Fed funds futures are pricing in a 62% probability for a 25-basis point rate hike in a week and a half. That’s up from 60% earlier this week. It does not seem that anyone is very surprised, except for the PhD economists that make up the consensus view, that these August numbers were so robust.

At the time of publication, Guilfoyle had no positions in any securities mentioned.