2023-07-07 14:57:03 ET
In the latest employment situation report published by the Bureau of Labor Statistics (BLS), the nonfarm payrolls (NFP) were up by 209,000 for the month of June, while the employment rate edged lower to 3.6%.
The NFP number underperformed industry expectations of 224,000-230,000.
As per an earlier article quoting ZeroHedge, this marks the first time that the actual number fell below the consensus expectation in 15 months.
The underperformance came despite the surge in ADP private employment numbers reported yesterday.
Could this be a signal that labour market fortunes are turning for the worse?
Since March 2022, the unemployment rate has continued to range between a historic low of 3.4 per cent and 3.7 per cent.
The employment situation report publishes data from two surveys.
One is the establishment survey (known for the NFP numbers) and the other is the household survey which gives the level of employment.
As discussed in last month’s piece , employment refers to the following,
…persons (16 years or above) who have worked 1 hour or more over the week in which the survey was conducted. This could be in a professional organization, their own company, or a farm. In the case of a family enterprise, unpaid workers are also included if they work more than 15 hours during the week. Employment also includes workers who were temporarily absent from work under a variety of scenarios including vacation, illness, personal issues, and a host of other reasons. The key point is that while tallying up the employment number, each worker is only counted once, even if they are working in multiple jobs.
However, the NFP uses a different methodology and counts all employees leaving out farm workers, but is vulnerable to double counting.
Mike Shedlock, a well-known economic blogger, and registered investment advisor, noted ,
These distortions artificially lower the unemployment rate, artificially boost full-time employment, and artificially increase the payroll jobs report every month.
This was well below the half-yearly average of 278,000 per month so far in 2023 and is a significant step down from the average of 399,000 per month in 2022.
However, government hiring has exploded this year, averaging 63,000 per month for 2023, nearly triple the 2022 average of 23,000.
This is an indication that on average, hiring in other sectors has reduced dramatically, while government jobs are partly compensating for this fall.
Among healthcare workers, contrary to the month’s trend, dentists recorded a decline of 7,000 jobs.
The construction sector had a strong showing, averaging 15,000 hirings per month in 2023, down from 22,000 in 2022.
Hourly earnings continued to show strong growth at 0.4% MoM, compared to an estimate of 0.3%.
On an annual basis, this works out to an increase of 4.4% which is far too high to bring inflation down to 2% levels.
This would suggest that the Federal Reserve will have to continue tightening, despite the NFPs undershooting market expectations.
The CME FedWatch Tool which stood at 92.4% for a 25-bps hike after the publication of yesterday’s jobless claims report (of which, the commentary is available here ), has been pushed even higher to 94.9% at the time of writing.
The average workweek time headed higher by 0.1 hours to 34.4 hours for the month of June.
Despite the moderate underperformance of the NFP numbers in June, the real reduction has come through the revisions.
April NFP was revised sharply downwards from 294,000 to 217,000, or by 77,000.
The May numbers that took everyone by surprise have also been revised downward by 33,000 to 306,000.
Thus, combined revisions for April and May amount to 110,000 below previous reports, while the June numbers were 15,000 below the consensus expectations.
Household survey employment
The employment level rose by 273,000 from 160,721,000 in May 2023 to 160,994,000 in June 2023.
Labour participation stayed steady at 62.6% for a fourth consecutive month.
The number of workers classified as working ‘part-time for economic reasons’ surged by 452,000 to 4.2 million in June.
These are workers who would prefer full-time work but could not get it, either since their hours had been reduced or they were not able to secure a full-time role.
Each of these categories accounted for 308,000 and 124,000 jobs, respectively.
This is a worrying sign and indicates that the labour market is unable to cater to job demand, at least in some cases.
‘Part-time for non-economic reasons’ declined by 597,000.
These are workers who had to take a part-time job due to personal issues such as childcare.
Contrasting NFP and employment
As per the BLS,
An over-the-month employment change of about 130,000 is statistically significant in the establishment survey.
However, we know that the NFP can suffer from double-counting, introducing uncertainty into labour market strength.
On the other hand, the employment level from the household survey has been persistently volatile and, in some cases, has moved in the opposite direction to the change in NFPs, adding to the uncertainty.
…the threshold for a statistically significant change in the household survey is about 600,000.
Commenting on the BLS report as a whole, particularly given the sharp revisions in the recent past, Shedlock added,
…we cannot, with strong confidence, suggest these reports portray an accurate picture of either jobs or employment.
This month, the headline numbers don’t appear particularly remarkable, although they underperformed market expectations to a degree.
Average hourly wages are elevated and would suggest that the Fed should continue hiking.
However, Mike Maharrey, Managing Editor of SchiffGold noted ,
…and a lot of these jobs again are people getting second jobs third jobs part-time jobs trying to deal with the ever-rising cost of everything.
In addition, a FEDS Notes piece published by the Federal Reserve on 23 rd June 2023, ended on an alarming note,
With the share of distressed firms currently standing at around 37 per cent, our estimates suggest that the recent policy tightening is likely to have effects on investment, employment, and aggregate activity that are stronger than in most tightening episodes since the late 1970s.
Given the economic devastation of the 1970s and the state of US firms today, can the Fed continue to hike, especially given the unknowns about monetary lags?
Moreover, while unemployment (U-3) edged down from 3.7% to 3.6%, U-6, a much more comprehensive measure rose from 6.7% to 6.9%.
U-6 accounts for all workers in the economy who are actively looking for work but remain unemployed.
Again, a depleted labour force due to mass exits since the pandemic may be leading to persistently underestimating the U-6 measure as well.
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