Pay Now, Or Pay Later: Jobs Data Looks Consistently Weaker

Consistently weaker is how I would describe the monthly jobs data released by the Bureau of Labor Statistics, through the results of the agency's two surveys. One positive takeaway, I guess, from this release, is that for once, the agency's Household, Establishment surveys and the ADP Employment Report on private sector employment all came about as close as it gets to actually backing each other up. That is different, as the Establishment survey for the past year and beyond had been wildly more optimistic than either of the other two, which is likely why that survey is the one the financial media has clung to as if it were gospel.

Job Creation & Key Data: Getting in the Weeds

Concerning job creation for June, the BLS Establishment survey posted non-farm payrolls growth of 206,000, with downward revisions of 54,000 to May and 57,000 to April for a net gain of 95,000 positions. This was well below the 183,000 jobs or so that economists had been looking for. Most frightening perhaps were government hires that totaled 70,000 for the month. That's a lot for one month and comes to almost 74% of the net growth in non-farm payrolls. One positive, only 59,000 jobs were attributed to the birth/death model in June. That had been a key driver for growth in non-farm payrolls over the past year and change accounting for almost 2 million reported jobs created over that time that may very well not exist.

The Household survey showed 116,000 more employed people in June than in May, which was a nice increase from May as that month showed a decrease of 408,000 employed people. The Household survey also showed an increase of 162,000 unemployed persons, while 87,000 persons returned to the labor force. Readers may recall that this past Wednesday, ADP reported private sector job creation of 150,000, which was a third consecutive month of decelerating growth for that data-point.

At the end of the day, the Participation Rate increased from 62.5% to 62.6%, while the Employment to Population Rate held at 60.1%. The Unemployment Rate increased from 4% to 4.1%, while the underemployment rate held firm at 7.4%. It looks like there was a reduction in part-time workers in June, which reverses a year-long trend. While this release shows a reduction of 520,000 part-time workers in June, one must remember that the U.S. economy has lost 1.55 million full-time jobs over the past year.

Wage growth slowed to growth of 3.9% year over year from 4.1%, and on a month over month basis from growth of 0.4% to 0.3%. This deceleration in wage growth was expected and should be priced in. The average full-time workweek held firm at 34.3 hours which is at the low end of the modern range, so while some part-timers may have been upgraded to full-time work, there has not yet been a need to increase the average workweek.

Demographic Diversions

Here is where we start to run into some real trouble in this release:

Gender

- Unemployment among men held firm at 3.9%

-Unemployment among women, however, increased to 3.7% from 3.4%.

Race

- Unemployment among whites held firm at 3.5%.

- But unemployment among Blacks increased to 6.1% from 6.3%.

- And unemployment among Asian Americans increased to 4.1% from 3.1%.

- Hispanic or Latino unemployment decreased to 5.0% from 4.9%.

Education

- High school dropouts' unemployment held firm at 5.9%.

- Those with a high school diploma but no college saw unemployment decrease to 4.2% from 4.3%.

- Those with some college saw unemployment increase to 3.4% from 3.1%.

- Finally this with a college degree or higher saw unemployment increase to 2.4% from 2.1%.

My Take

June was another month of deceleration in U.S. labor markets, though it was not nearly as awful as it could have been. It's no secret that I have trusted the ADP Report over the BLS reports over the past year as ADP had corrected their issues, and their data is just that, based on data, whereas the BLS surveys are also just that, based on surveys. I have also tended toward trusting the household numbers more than the NFP prints because the NFP prints had been boosted by what were likely errors in the modeling. The BLS BED report back in April literally told us that much.

While the unemployment rate is starting to really soar across certain demographics, the overall labor market, while weaker, is not falling completely out of bed. This is at least for now, an orderly retreat, which is something the Fed without admitting as much, has very likely been trying to engineer. The question now becomes one of "Is this the soft landing that the Fed tried to finesse?" or "Is this just the tip of the iceberg and now poop is about to get real?" I must also ask as the private sector grapples with increased borrowing costs, will they be able to invest in their businesses, to include human resources, as they had over the past few years?

Fed Funds Futures

Concerning the July 31 decision, the probability for no change in policy at all has increased to 95%, as the likelihood for a 25-basis point reduction made to the target range for the Fed Funds Rate by Sept. 18 is now 72%. The odds of at least a 25 basis point rate cut by Nov. 7, which is after the election, now stands at 85% with 33% chance for 50 basis points worth of rate cuts by then.

Readers know that I think the Fed should wait until after the election to adjust policy as that would keep them out of politics. Of course, I would exclude having to respond to, or prevent an economic crisis from these unwritten rules. Is the U.S. economy headed for a crisis? Not at the moment. That said, current and past fiscal policy almost demands a reset. There is always a "next" recession. There is always a "next" credit crisis. These are whens, not ifs.

Should the Fed jump the gun and reduce rates ahead of reaching its targeted rate of inflation to arrest the now obviously decelerating economy? I would say "no" for the time being. The economy will be overtly stronger if it can get through a mild to moderate rough patch without immediately turning toward easier policy. Of course, a legislature more focused than this one on cutting discretionary spending would have to be part of the solution. Austerity is a dirty word in economics since Keynesian economics became the rule and "modern monetary theory" became part of the lexicon. That said, we are either going to have to travel down a more "austeric" path, or likely face perhaps even more severe consequences.

At the time of publication, Guilfoyle had no position in any security mentioned.