The Big Picture
Briefing.com Summary:
*Payroll growth is limping along, flashing warning lights the Fed can't ignore much longer.
*The Treasury market is pricing in a weaker growth outlook.
*The labor market isn't broken, but there are cracks.
The Employment Situation Report is aptly named because the Federal Reserve, the Trump administration, and the U.S. economy have an employment situation on their hands. That situation hit home with the release of the July employment report, and, unfortunately, it didn't get better with an August employment report that also carried another downward revision to June nonfarm payrolls.
The funny thing is, the stock market greeted the August report with open arms initially, only it wasn't angling to hug the report itself so much as it was angling to hug the rate cuts it sees coming.
It was a patented "bad news is good news" reaction. And you knew it was bad news based on the Treasury market's reaction. Yields shot lower across the curve, with participants pricing in rate cuts at the front of the curve and—this may just be the kicker—weaker growth at the back of the curve.
Objectively Speaking
We can be concise with our supposition that this employment report provided another clear picture that the labor market is weakening. The following details make our objective case:
- Nonfarm payrolls were up just 22,000 in August (Briefing.com consensus: 78,000). Nonfarm private payrolls were up only 38,000 (Briefing.com consensus: 90,000).
- The 3-month average for nonfarm payrolls, after accounting for another downward revision to June nonfarm payrolls that showed a loss of 13,000 positions, was a scant 29,000 (versus 82,000 in the same period a year ago).
- Manufacturing payrolls declined by 12,000.
- Professional and business services payrolls declined by 17,000, including a 9,800 decline in temporary help services.
- Persons unemployed for 27 weeks or more accounted for 25.7% of the unemployed versus 24.9% in July. Excluding the COVID crisis, that is the highest since June 2016 and reflects the heightened challenge in finding a new job.
- The U-6 unemployment rate, which accounts for unemployed and underemployed workers, increased to 8.1% from 7.9% in July. Excluding the COVID crisis, that is the highest since October 2017.
- Average hourly earnings growth is decelerating.
- There was no increase in average weekly hours, which held steady at 34.2 for the third straight month.
Briefing.com Analyst Insight
To be fair, the labor market is not weak per se. The objective data also suggest as much, particularly an unemployment rate that sits at 4.3%. Nevertheless, there is a weakening trend that isn't conducive to an acceleration in discretionary spending.
That is most likely why the market is guiding the Federal Reserve to a rate cut. Following the August employment report, the fed funds futures market was quick to price in at least 75 basis points worth of cuts before year-end, whereas before the report the prevailing expectation was for 50 basis points worth of cuts.
The stock market's initial reaction to the report, then, was rooted in the notion that the Fed will be more aggressive in altering its restrictive monetary policy, but at the same time its enthusiasm was tempered by the consideration that the Fed is late to this game and that economic and earnings data will suggest as much in the coming months.
That outcome doesn't match at all with the Trump administration's outlook, and frankly, it hasn't been the stock market's default view either. Both the administration and the stock market could be right, but a sense of urgency is building with respect to the all-important labor market.
Hiring activity has weakened noticeably; average hourly earnings growth on a year-over-year basis is decelerating; and the ranks of the underemployed are rising. It is an employment situation that isn't broken entirely but still needs fixing.
