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U.S. January Employment Report: Comments from Christophe Barraud

Christophe Barraud, Chief Economist & Strategist at Market Securities, sent me his analysis concerning the U.S. January employment report:

 

1/ Despite negative temporary factors (adverse weather conditions, labor disputes at major West ports…), NFP rose 257K in January, well ahead of a consensus of ~230K. There was also a big net upward revision to November-December of 147K that left the three-month average growth at 336K (highest since Nov. 97).  With the latest revisions, the U.S. added 3.12 million jobs in 2014 (an upward revision to the prior estimate of 2.95 million), the best since 1999′s gain of 3.18 million jobs.

 

2/ Separately, the main event is the sharp rebound of average hourly earnings MoM (strongest increase since Nov. 2008) which pushes the YoY figure (+2.2%) to its highest level since Nov. 2013.

 

3/ Concerning the “Household Survey”, including the new population in the Current Population Survey (CPS) estimation process, the unemployment rate was estimated at 5.7% (not directly comparable with data for December 2014 or earlier periods) which remains close to the threshold defined by the CBO as the NAIRU (full employment), namely 5.6%.

 
4/ All in all, it was another very strong report which  downplayed doubts about the current wages’ growth. As a consequence, more than ever, I believe that the Fed remains on track to raise rates in H1 2015, more precisely in June .

Employment Report Shows that Labor Market Conditions Have Only Improved Slightly in July

According to the Bureau of Statistics, total nonfarm payrolls increased by 162,000 in July (below expectations), and the unemployment rate fell 0.2% to 7.4% against 7.5%e. The average workweek for all employees on private nonfarm payrolls dropped to 34.4 hours in July while average hourly earning decreased 0.1% MoM:

 

From BLS:

 

Total nonfarm payroll employment increased by 162,000 in July, with gains in retail trade, food services and drinking places, financial activities, and wholesale trade.
 
The change in total nonfarm payroll employment for May was revised from +195,000 to +176,000, and the change for June was revised from +195,000 to +188,000. With these revisions, employment gains in May and June combined were 26,000 less than previously reported.
 
Both the number of unemployed persons, at 11.5 million, and the unemployment rate, at 7.4 percent, edged down in July.
 
The average workweek for all employees on private nonfarm payrolls decreased by 0.1 hour in July to 34.4 hours.
 
In July, average hourly earnings for all employees on private nonfarm payrolls edged down by 2 cents to $23.98, following a 10-cent increase in June.
 
In July, the number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 4.2 million.
 
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 8.2 million in July.

 
I – My view:
 
1/ Nonfarm payroll figures were below expectations such as average hourly earnings and average weekly hours worked suggesting that incomes and consumption spending will only progress slightly in July.
 
2/ Moreover, the decrease of wages associated with the drop of the “Price Paid” component of the ISM manufacturing show that inflation could slow in the coming months confirming the recent Fed remark.
 
3/ The short term momentum of NFPs is still below the threshold of 200K which is not a minimum acceptable for Fed:
-> Moving average 3 months: 181K
-> Moving average 4 months: 183K
-> Moving average 5 months: 177K
-> Moving average 6 months: 201K
 
4/ Concerning qualitative indicators, even if the number of unemployed people decreased (-263K), the number of persons employed part time for economic reasons and long-term unemployed (those jobless for 27 weeks or more) were little changed. Besides, the fall of unemployment is also explained by a new decrease of participation rate (-0.1% to 63.4%).
 
 

II – Implications on Fed:
 
Even if labor market conditions are improving slightly, we are far away from Fed’s targets. Most of qualitative indicators were little changed in July and the fall of unemployment rate could be reversed next month with a rise of participation rate.
 
Based on the report, we could only expect a small improvement concerning incomes and consumption spending which is coherent with the drop of new auto sales (-1.8% MoM) in July. Industrial production should stagnate because even if NFP rebounded in the manufacturing sector (+6K), weekly hours worked decreased from 40.8h to 40.6h.
 
Finally, the decrease in wages suggests that inflation pressures are easing.
 
Therefore, my conviction remains that consensus view of “tapering” in September is not realistic in a context where fiscal uncertainty will remain in Q3 until lawmakers find an agreement on “continuing resolution” and 2014 budget.

June Employment Report Shows Improvement regarding Quantity but not Quality

According to the Bureau of Statistics, total nonfarm payrolls increased by 195,000 in June (above expectations), and the unemployment rate remained unchanged at 7.6% against 7.5%e. The average workweek for all employees on private nonfarm payrolls was unchanged in June (34.5 hours) while average hourly earning rose 0.4% MoM:

 

From BLS:

 

Total nonfarm payroll employment increased by 195,000 in June, in line with the average monthly gain of 182,000 over the prior 12 months. In June, job growth occurred in leisure and hospitality, professional and business services, retail trade, health care, and financial activities.
 
The change in total nonfarm payroll employment for April was revised from +149,000 to +199,000, and the change for May was revised from +175,000 to +195,000. With these revisions, employment gains in April and May combined were 70,000 higher than previously reported.
 
The number of unemployed persons, at 11.8 million, and the unemployment rate, at 7.6 percent, were unchanged in June.
 
The average workweek for all employees on private nonfarm payrolls was unchanged in June at 34.5 hours.
 
In June, average hourly earnings for all employees on private nonfarm payrolls rose by 10 cents to $24.01. Over the year, average hourly earnings have risen by 51 cents, or 2.2 percent.
 
In June, the number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 4.3 million.
 
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 322,000 to 8.2 million in June.

 
I – My view:
 
1/ Nonfarm payroll figures were above expectations such as average hourly earnings (largest MoM rise since July 2011) suggesting that incomes and consumption could accelerate significantly in June.
 
2/ Nevertheless despite higher revision the last two months, the short term momentum is still below the threshold of 200K which is not a minimum acceptable for Fed:
-> Moving average 3 months: 196K
-> Moving average 4 months: 183K
 
3/ The fact is that 200K is only sufficient to absorb new entrants but does not allow to push the number of unemployed lower:
-> The number of unemployed people rose slightly: +17K at 11.777K
 
4/ The other qualitative indicators show very poor performance as:
-> The long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged (-29K) at 4.3 million.
-> Underemployment rate rose from 13.8% to 14.3% because the number of “part time employed for economic reasons” rose 322K.
-> Part-time jobs soared by 360K to 28.059K – an all time record high – while full time jobs were down 240K.
 
II – Implications on Fed:
 
Even if inflation expectations rise because of wage pressures, the employment situation only improved slightly regarding quantity and deteriorated concerning quality. Moreover, another important fact is that participation rate rose the last two months suggesting that a part of people which disappeared from statistics because of cyclical factors (not demographic), is coming back and could support unemployment rate in the coming months.
 
As a consequence, I believe this report does not represent a support for Fed to taper the asset purchases program before December. This view is not shared by Goldman Sachs and JP Morgan:
 

June hiring strength makes it more likely the Federal Reserve will slow its bond buying program in early autumn, rather than at the close of the year, economists at two top Wall Street banks said Friday.
 
Saying the June hiring news was “not too shabby,” JPMorgan economist Michael Feroli told clients in a note that he now expects the central bank to trim what is currently an $85 billion per month bond buying program in September. Before the jobs report, Mr. Feroli had expected the Fed to set in motion the bond buying slowdown in December.
 
Meanwhile, Goldman Sachs also penciled in a September slowdown in Fed bond buying, from December. Noting the June jobs data was better than expected, they liked the payrolls growth, revisions to prior months’ data and the increase in earnings. They downplayed the unchanged unemployment rate amid favorable changes in the number of workers relative to the size of the broader population and overall labor force.

US May Employment Report: A Preview

Tomorrow, the BLS will publish May Employment report and it will give more details regarding the labor market situation. The Bloomberg consensus expects nonfarm payrolls and unemployment rate to be unchanged from April at respectively 165 K and 7.5%.

 

It will be very difficult for economists to anticipate nonfarm payrolls to the extent that proxys showed mixed signals:

 

1/ (+) During the survey period (2nd week of May), the four-week moving average of initial claims decreased from 362 K (previous survey period) to 340 K.

 

2/ (+) On the same period, continuing claims also fell from 3007 K in April to 2923 K in May.

 

3/ (+) The confidence surveys which are linked to labor market situation improved significantly in May:
- The University of Michigan and the Conference Board surveys increased respectively by 8.1 pts to 84.5 (highest level since July 2007) and 7.2 pts to 76.2 (highest level since February 2008).
- Note that “Employment” component of the Conference Board (Hard to get a job minus Plentiful) rose from -27.2 in April to -25.3 in May.

 

4/ (+) Beige Book noted hiring still increased at a measured pace:

Hiring increased at a measured pace in several Districts, with some contacts noting difficulty finding qualified workers.

 

5/ (+) According to Challenger, the number of planned layoffs at U.S. firms fell in May for the third month. Employers announced 36,398 job cuts last month, down 4.5 percent from 38,121 in April, according to the report from consultants Challenger, Gray & Christmas. May’s layoffs were also significantly lower than what was seen a year ago, down 41.2 percent from last May’s 61,887.

 

6/ (+) Intuit Survey showed that small businesses hired the most since January 2012.

 

7/ (-) ADP report said that large firms hired less than small firms. Private sector only hired 135 K in May.

 

8/ (-) In May, both Manufacturing and Services “Employment” components were down from April confirming that large firms hired less than in April.

 

9/ (-) Online advertised vacancies fell 150,200, or 3 percent, in May to 4,827,600 in The Conference Board Help Wanted OnLine Data Series.

 

10/ (-) Gallup’s seasonally adjusted U.S. unemployment rate for May was 8.2%, up from 7.8% in April. Gallup calculates its seasonally adjusted employment rate by applying the adjustment factor the U.S. government used for the same month in the previous year.

 

These data sent mixed signals nevertheless it seems that hirings were stronger at the beginning of the month when the survey was conducted. Indeed, weather was milder and we could expect hirings in the retail and construction sectors to be well oriented. Small firms will also add more people in May. So, despite some negative signals this week, a positive surprise can’t be excluded.