July 2016 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment added to June’s gain when rising by 255,000 jobs, significantly more than even the upper end of expectations (+215,000; consensus: 185,000). Combined May and June employment gains were upwardly revised by 18,000 (May: +13,000; June: +5,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) held steady at 4.9% as those who found employment (+420,000) were nearly matched by growth of the labor force (+407,000). 

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Observations from the employment reports include:

* A number of analysts (e.g., Mitsubishi UFJ strategist John Herrmann) claimed the jobs headline “overstates” the strength of payrolls, and that the BLS had applied a “very benign seasonal adjustment factor…to transform a [middling] gain into a strong gain.” Admittedly, we are somewhat skeptical of the jobs report whenever either imputed jobs from the CES (birth/death model) adjustment represent a substantial proportion of the headline number or when seasonal adjustments “swamp” the reported total. However, despite an outsized CES adjustment (roughly 2½ times the July average between 2009 and 2015), seasonal adjustments to both the establishment and household surveys were not out of line with past years.

* Manufacturing gained 9,000 jobs in July. That result is inconsistent with the behavior of the Institute for Supply Management’s manufacturing employment sub-index, which resumed contracting after a one-month reprieve in June. Wood Products lost 1,400 jobs, and Paper and Paper Products employment dropped by 1,500.

* Mining and logging shed 7,000 jobs, with 3,000 coming from support activities for mining and another 2,000 from oil and gas extraction. Construction employment jumped by 14,000.

* Over 76% (165,700) of July’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +14,700; Professional & Business Services: +70,000 (of which Temp Help comprised 17,000); Education & Health Services: +36,000; and Leisure & Hospitality: +45,000. This is a persistent issue, as we have repeatedly highlighted: There are over 1.4 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but nearly 1.7 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. In fact, Manufacturing has gained only 11,000 jobs since 2014 while FS&D jobs have expanded by 487,400. 

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* The employment-population ratio edged up to 59.7 %; roughly speaking, for every five people added to the population, only three are employed. Meanwhile, the number of employment-age persons not in the labor force fell by 184,000 -- but remained over 94.3 million. 

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* As a result of new and/or re-entrants to the labor force, the labor force participation rate (LFPR) also ticked up to 62.8%, comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.08 (to $25.69), resulting in a 2.6% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.07, to $21.59 (+2.6% YoY). With the CPI running at an official rate of +1.0% YoY, in theory wages are rising in real (inflation-adjusted) terms. The average workweek for all employees on private nonfarm payrolls inched up 0.1 hour, to 34.5 hours. 

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* Full-time jobs rose by 306,000 while those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- increased by 97,000. There are now 2.0 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by nearly 20.5 million). PTER employment, by contrast, stopped declining in October 2015 and has since been oscillating around 6 million. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in July decreased by $3.1 billion, to $177.5 billion; that is also -1.0% YoY. To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending June was 3.1% above the year-earlier average, well off the peak of +13.8% set back in September 2013.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.