So, the squishy and amorphous “some further [labor] improvement” remains the lift-off bogey for a self-described quantitative, data dependent Fed. On balance, the July employment data probably met that nebulous criteria threshold. Speculative angst is free to crescendo into the Sept 17th FOMC announcement.
The Annual Hedgeye Summer party starts in T – 10 minutes and we’re not particularly big on adding to the noise of manic data reporting on employment Friday, so we’ll keep it tight with the summary highlights below. If you have any specific questions or would like to dig/discuss a particular dimension of the labor market in more depth, let us know.
- Payrolls | Best Before the Crest: NFP and private payrolls slowed both sequentially and in rate of change terms. May/June get a net positive revision of +14K. While moving past peak rate-of-change in payroll growth does not herald an imminent roll in the eco cycle, the reality is that we’re late cycle in the current expansion and the labor party is always best before the crest.
- Unemployment Rate | Less Bad: The Unemployment Rate was flat sequentially at +5.3% but the internals were largely positive as the participation rate held steady and the labor fore rose with the chg in employment > chg in unemployed. The U-6 rate (underemployment rate) dropped a tick to 10.4% with PT involuntary workers declining -180K.
- Wages | Up … But Not Really: Both Total Private & Nonsupervisory Worker wage growth accelerated sequentially but the gain just represents more oscillation above & below middling. Not what Team Janet wants to see although they’ve been making an attempt at quasi-marginalizing the trend in wage growth on policy decisions (see March Speech to review that commentary)
- Hours Worked | Prepare the Punditry: This will probably be the favorite pundit talking point – and with some justification. Average weekly hours worked rose by a tenth to 34.6hrs; the first increase in 5-months. Income = Hours worked * earnings per hour, so why a longer average work week is good for aggregate incomes is straightforward (& that lowly tenth adds up to something material when applied across an employment base of 142MM). Further, people working more hours is tantamount to more workers working the same hours – a concept termed “Job Equivalence” or “Labor Usage” - so you’ll hear the case made that the +215K NFP gain is equivalent to something like a ~350K gain when factoring in the increase in hours worked and taking a job equivalence perspective of the data.
- Income | Wages Weak, Income ↑: In a Keynesian economy, spending is king and the capacity for consumption flows from changes in the aggregate consumer P&L. One could take two, somewhat divergent, views of this morning’s wage & income data:
- Wage Growth: Private hourly Wage growth at 2.1% YoY was better sequentially but below estimates for +2.3% and does nothing to offset the disappointment from the slowdown reported in the ECI last week. Policy makers disappointment extends yet another month as wage inflation remains in RoC purgatory.
- Aggregate Income Growth: On net, the July data will be good for the aggregate income figures when they are reported for July. Again, the math is trivial: Flat Employment Gains + ↑Hours + ↑Wage growth = ↑ Aggregate DPI/Salary & Wage growth. In short, the aggregate consumer P&L improvement will remain ongoing with the savings rate remaining the swing factor for actual HH spending growth.
- Housing: On the supply side, resi construction employment rose by +6K with industry remaining in healthy expansion. On the demand side, employment growth in the key housing demographic of 25-34 year olds decelerated to 2.3% YoY in July. Inclusive of the July deceleration, growth in the cohort continues to run at a premium to the broader average and the trend for the cohort remains one of ongoing improvement.
- Energy | Eye of the Storm? The Challenger Job Cut data released yesterday showed ~9K in announced cuts in the sector in July. The BLS data was more equivocal. The Oil and Gas extraction industry – for which we have data thru July – showed employment rising by 0.5K. Across the broader sector aggregate – for which we have data thru June – showed net employment falling -5.7K, marking a 7th consecutive month of net decline for a cumulative total of 79K. Should strong-dollar led energy price deflation continue, we expect a re-acceleration in energy sector job loss as 2015 hedges roll off and commodity price exposure becomes more acute.
Christian B. Drake