INDICATOR: August Employment Report
KEY DATA: Payrolls: +169,000; Private Sector: +152,000; Unemployment Rate: 7.3% (down 0.1 percentage point)
IN A NUTSHELL: "Firms may not be firing people but it also appears they are not hiring a whole lot of workers."
WHAT IT MEANS: Wrong again. I actually believed the unemployment claims numbers, which are signaling a lot better payroll gains. Keep in mind, the monthly payroll number is the difference between terminations - which includes layoffs and retirements - and hires. Well, the layoffs may be slowing but the retirements and most discouragingly the hiring don't look to be rising. As a consequence, private sector payrolls are increasing at a lackluster pace. A huge (22,000) drop in movie making jobs was a prime factor in that and why that happened is anyone's guess. Meanwhile, early school openings likely artificially increased the number of education workers, which added 20,000 to the total. That could easily unwind in September. And what was really disturbing was a large (74,000 total) downward revision to the June and July gains. That usually signals a slowing in hiring. For the last three months, we have averaged just under 150,000 per month. That is not enough to generate a whole lot of additional income. Wages and hours worked did rise nicely but that may be due to seasonal adjustment issues in the vehicle and education sectors. About the only good news in the report was the drop in the unemployment rate to its lowest level since the end of 2008. The number of part-time workers fell but that only shows the absurdity of making any judgment about part-timers using monthly data.
MARKETS AND FED POLICY IMPLICATIONS: Job gains are just not good enough. Whether this was a summer bummer or an emerging trend to less hiring is unclear but it is disappointing nonetheless. As for the decline in the unemployment rate, there are those that will say that it was entirely due to a drop in workforce participation. My response is so what? As I have argued many times before, there are an awful lot of factors under way. The overall labor force participation rate has declined fairly consistently for 16 years. The male labor force participation rate has fallen for 65 years while the female rate peaked over 13 years ago. That shows a long-term not a short-term trend. Has the weak labor market accelerated the trend? No doubt, but saying the declines in the unemployment rate are artificial is simply wrong. And as for the part-time issue, part-time payrolls are growing more slowly over the year than full time and all the increase in part-time jobs went to those who wanted part-time jobs, not those that had to take part-time positions. All that doesn't mean much to the unemployed who still face a daunting labor market. The mediocre payroll gains will not drive down the unemployment rate rapidly and we need to cut the rate by a percentage point to get strong wage gains. Since the stagnation of income is the biggest impediment to growth (including hiring), this report does not bode well for a sharp acceleration in the economic activity. Whether the FOMC reads it that way is anyone's guess, as I still don't understand the rush to start tapering. As for investors, this report is a reminder that if earnings will drive stock prices, there are some serious questions whether profit gains can be sustained.