After the blowout payroll employment number reported by ADP yesterday, investors were expecting a similarly strong showing from the government employment report today. They didn’t get it. Instead, those who bid up shares yesterday on hopes built upon a single monthly data point from a famously inaccurate source took it in the neck. This morning’s payroll employment report was dismal. Stocks plunged on the news—giving up all of yesterday’s gains and then some.
Officially, economists were looking for total nonfarm payrolls to expand by 105K. Unofficially, after yesterday’s ADP report, estimates were higher. Instead of a big upside surprise, investors were greeted with just the opposite. Payroll employment increased by just 18K, and last month’s payroll gains were revised down to 25K from an initial estimate of 57K. The labor market is at stall speed. Looking at the report by sector, manufacturing employment rose by 6K, and services employment expanded by a modest 53K. The biggest drag on employment this month was once again the government sector. Over the last three months, federal, state, and local governments have shed jobs at an average rate of 37K per month.
Turning to the household employment report, which surveys individuals instead of businesses, we have an indication that the labor market may be even softer than the payroll survey indicates. According to the household survey, employment fell by 445K in June—the second decline in three months. Over the last three months, household employment has fallen 530K, or 176K per month. The household survey is also the report that is used to estimate the unemployment rate. In June, the unemployment rate rose to 9.2% from 9.1% in May—the third consecutive increase. And were it not for the 449K people who dropped out of the labor force, the unemployment rate would have risen to 9.5%. When you include discouraged workers and those working part-time for economic reasons, the unemployment rate is back over 16%.
But the most frightening data point on the labor market by far can be seen in Young Research’s chart on the U.S. employment-to-population ratio. The number of Americans employed as a percentage of the population is at levels last seen in the mid-1980s. Not a problem if those workers still employed were earning more money, but they aren’t. YTD, real wages are down almost 2.5%.
The labor market has a real ugly look. Payroll growth has stalled, unemployment is rising, folk are dropping out of the labor force like flies, and wages aren’t keeping pace with inflation. You don’t get sustainable economic growth without a strong labor market. Invest accordingly.
Jeremy Jones, CFA
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