US: Employment Situation


Fri Aug 07 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Nonfarm Payrolls - M/M change 212,000 210,000 to 262,000 215,000 223,000 231,000
Unemployment Rate - Level 5.3% 5.2% to 5.4% 5.3% 5.3% 5.3%
Private Payrolls - M/M change 210,000 200,000 to 258,000 210,000 223,000 227,000
Average Hourly Earnings - M/M change 0.2% 0.2% to 0.3% 0.2% 0.0% 0.0%
Av Workweek - All Employees 34.5hrs 34.5hrs to 34.6hrs 34.6hrs 34.5hrs 34.5hrs
Participation Rate - level 62.6% 62.6% 62.6%

Highlights
The numbers aren't spectacular but they're solid enough to keep a September rate hike in play. Non-farm payrolls rose just about as expected, up 215,000 in July with upward revisions adding 14,000 to the prior two months. The unemployment rate is unchanged at 5.3 percent. Wages show some traction, up 0.2 percent in the month with the year-on-year rate over 2 percent at 2.1 percent. The average workweek is up, rising to 34.6 hours from a long run at 34.5. The labor force participation rate, which dropped sharply in June, held at 62.6 percent.

Other details look surprisingly solid with payrolls rising 60,000 in trade & transportation, for a third straight strong gain, and professional & business services rising 40,000 to extend their long healthy run. Retailers continue to add jobs, up 36,000 for their third straight strong gain with the motor vehicle subset up 13,000 and reflecting the strength of car sales. Manufacturing, which is usually weak, rose a notable 15,000 in the month with construction, where lack of skilled labor is being reported, showing a modest gain of 6,000.

Another plus in the report is a decline in Janet Yellen's favorite reading, the broadly defined U-6 unemployment rate which is down a notch to 10.4 percent. If the August employment report a month from now looks this good, a rate hike at the September FOMC will be a lock.

Market Consensus Before Announcement
The employment situation report has not been strong but has been strong enough to keep up expectations for a rate hike later this year. The Econoday consensus for July non-farm payroll growth is 212,000 vs 223,000 in June and compared against the second-quarter average of 221,000. The unemployment rate, which ratcheted 2 tenths lower in June on a striking decline in the labor force, is expected to hold steady at 5.3 percent. Average hourly earnings, which came to a sudden standstill in June, are expected to rebound a moderate 0.2 percent and will be watched with extra attention for inflation clues on Fed policy.

Definition
The employment situation is a set of labor market indicators based on two separate surveys in this one report. The unemployment rate equals the number of unemployed persons divided by the total number of persons in the labor force, which comes from a survey of 60,000 households (this is called the household survey). Workers are only counted once, no matter how many jobs they have, or whether they are only working part-time. In order to be counted as unemployed, one must be actively looking for work. Other commonly known figures from the Household Survey include the labor supply and discouraged workers.

The Establishment Survey-a survey of over 557,000 worksites- provides additional indicators. Nonfarm payroll employment is the most popular and well-known indicator from this survey. Business establishments in the nonfarm sector report the number of workers currently on their payrolls. Double counting occurs when individuals hold more than one job. Workers on strike during the relevant week are not included in the figures.

Due to sizeable swings in payroll employment during 2010 for hiring and then layoffs of temporary workers for the decentennial Census, analysts started giving essentially equal attention to private nonfarm payrolls as to overall payrolls. This added focus continued even after temporary Census worker issues were no longer a problem as the long-duration recession caused state & local governments to cut their workforce even as the private sector began to rehire during recovery.

The average workweek is a leading indicator of employment. Businesses tend to adjust total hours worked by increasing or decreasing the workweek before hiring someone new or laying someone off. These figures come from the Establishment Survey.

Average hourly earnings are monthly payroll figures reported before deductions for taxes, social insurance and fringe benefits. They include pay for overtime, holidays, vacation and sick leave. These figures come from the Establishment Survey.






Description
If ever there was an economic report that can move the markets, this is it! The anticipation on Wall Street each month is palpable, the reactions can be dramatic, and the information for investors is invaluable. By digging just a little deeper than the headline unemployment rate, investors can take more strategic control of their portfolio and even take advantage of unique investment opportunities that often arise in the days surrounding this report.

The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state as well as the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.

The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures, even when economic conditions are soggy. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

By tracking the jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it's a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline - boosting up bond and stock prices in the process.


Importance
The employment situation is the primary monthly indicator of aggregate economic activity because it encompasses all major sectors of the economy. It is comprehensive and available early in the month. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. In short, it provides clues about other economic indicators reported for the month and plays a big role in influencing financial market psychology during the month. Additionally, the Fed has made 6.5 percent unemployment a threshold for considering changes in policy - both for quantitative easing and the fed funds rate. And the Fed has emphasized that it is overall labor market conditions that matter - not just a specific number.

Interpretation
The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.

The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates. The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.

Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services in the economy. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.

When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.

Gains in average hourly earnings represent wage pressures. It is worth noting that these figures aren't adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.