What Upbeat US Job Numbers Mean for the Economy

Strong non-farm payroll data were a standout in a sea of gloomy economic reports, despite a drop in hourly wages

Robert Johnson, CFA 8 August, 2017 | 12:44PM
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A respectable employment report at the end of the week provided great relief to many economists who were still a bit stunned from the negative data earlier in the week.

Month-to-month nonfarm payroll managed to show another month of growth, with 209,000 jobs, in excess of the 12-month average of 180,000, the consensus forecast of 180,000, and my forecast of 160,000. While we believe some faulty seasonal factors and unusual sector data have helped results over the past two months, we are pleased with the relatively strong data.

In a sea of negative economic reports over the past two week – including motor vehicle sales, pending home sales, construction spending and ISM Purchasing Manager Surveys - the employment data seems to suggest that things are not so bad. And a combination of better employment levels, hours worked, and hourly wage rates should keep wage data and likely consumer data moving ahead in the second half.

The month-to-month data, though always volatile and subject to revision, showed employment growth in excess of 200,000 jobs per month for three of the past four months. Although I can pick apart some of the strong monthly data, three very strong months suggests that, at a minimum, job growth deterioration has come to an end.

Nonfarm Payroll Data - monthly change

Nevertheless, jobs growth in June 2016 and July 2016 both approached 300,000 and surprised everyone to the upside. This year's job growth was better than most of the economic metrics released this week, as we noted in our opening, but not nearly as good as last year, suggesting that we shouldn't pop the champagne just yet. That is especially true given that August almost always provides a negative shock to the employment data.

Hours worked fell off meaningfully in 2015 and 2016 because of decreases at retailers that were initially afraid to lay off workers. This tended to buoy employment levels.

However, as retailers realised that their issues were not about the weather and that the Amazon effect wasn't going away any time soon, retail employee hours levelled off, but employment fell as layoffs began in earnest.

While we think this represents most of the real story, it is interesting to note that hours worked usually improve before employment levels, suggesting that better employment growth may lie just ahead.

Fall in Hourly Wages Causes Concern

The bad news is that the nominal growth in hourly wages has slowed some from about 2.8% to 2.5%. The good news is that CPI based inflation dropped from 2.6% to 1.8%, providing consumers with a little breathing room.

Many economists, including us, have complained about the lack of accelerating wage growth. Maybe our expectations have been too high given history and the demographic impact of more young workers, who are generally paid less than those they replace.

Spikes in real wages can occasionally be large, especially during bouts of deflation during a recession, while long, sustained runs in real hourly wage growth are extremely rare. Only three times over the past 50 years have real wages grown more than 3%. And all of those times were related to a temporary run of recession-related deflation. The possible exception was the period from 1995 to 2000 or so, the last time the U.S. economy faced a labour shortage.

We have a very had time ignoring national purchasing manager data either from the ISM or the Markit data sets. These data sets have a very long history and a very good track record at market bottoms. The ISM data along with initial unemployment claims were the only two major indicators flashing a buy signal at the bottom of the 2009 recovery.

However, the readings have always tended to be very hyperactive at industry tops, with many false readings. Worse, the data increasingly seems to be more of a sentiment indicator, with strong correlations breaking down. Plus, many of us put weight on relatively small swings. However, past data shows that it takes a really big swing in the indexes to make a difference.

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Robert Johnson, CFA  is director of economic analysis with Morningstar.

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