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August Employment Report Generates Some Headline Disappointment



Chief Market Analyst

The futures market was up before the release of the Employment Situation Report for August. Ostensibly, the news that the People’s Bank of China announced a 50-basis points cut in the required reserve ratio for China’s banks, effective September 16, was the catalyst, yet that cut was expected.

The best explanation for the strength in the futures market ahead of the jobs report is probably just continued momentum.

The past few sessions have been quite good for the stock market, pushing the S&P 500 back toward the 3,000 level and leaving it in close proximity to its all-time high. That move has been precipitated by the absence of “new” negative news more so than the arrival of fundamentally good news.

Granted yesterday’s economic data was fundamentally good news, yet the bulk of the gains to that point had been achieved on the back of reports that Hong Kong is withdrawing its extradition bill and that U.S. and Chinese officials will be meeting in Washington in early October to discuss trade matters.

In brief, those latter developments were nice to hear, but they have settled nothing on either front. They just conveyed that there wasn’t any worse news on either front than what had already been known.

What the Employment Situation Report for August conveyed is that payroll growth is slowing and wage growth remains modest. Job growth has averaged 158,000 per month so far this year, versus the average monthly gain of 223,000 in 2018. Average hourly earnings, meanwhile, were up 3.2% yr/yr in August, versus 3.3% in July.

The key takeaway from the August employment report is that it isn’t a distinctly disappointing report, even though the nonfarm payrolls and nonfarm private payrolls numbers might create that impression. The labor force participation rate increased to 63.2% from 63.0% in July (and 62.7% yr ago), the employment-population ratio rose to 60.9% from 60.7% (and 60.3% yr ago), and the total number of employed workers increased by 590,000 versus July. In sum, more people are working and earning money, which is a good recipe for increased consumer spending.

Other notable headlines from the Employment Situation Report are as follows:

  • August nonfarm payrolls increased by 130,000 ( consensus 171,000). Over the past three months, job gains have averaged 156,000 per month
    • July nonfarm payrolls revised to 159,000 from 164,000
    • June nonfarm payrolls revised to 178,000 from 193,000
  • August private sector payrolls increased by 96,000 ( consensus 145,000)
    • July private sector payrolls revised to 131,000 from 148,000
    • June private sector payrolls revised to 161,000 from 179,000
  • August unemployment rate was 3.7% ( consensus 3.7%), versus 3.7% in July
    • Persons unemployed for 27 weeks or more accounted for 20.6% of the unemployed versus 19.2% in July
    • The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.2%, versus 7.0% in July
  • August average hourly earnings were up 0.4% ( consensus +0.2%), after increasing an unrevised 0.3% in July
    • Over the last 12 months, average hourly earnings have risen 3.2%, versus 3.3% for the 12 months ending in July
  • The average workweek in August was 34.4 hours ( consensus 34.4) versus 34.3 hours in July
    • Manufacturing workweek increased 0.2 hours to 40.6 hours
    • Factory overtime declined 0.1 hour to 3.2 hours
  • The labor force participation rate was 63.2% in August versus 63.0% in July

The Treasury market rallied after the release of the jobs report, which was weaker than expected, especially with downward payroll revisions to prior months. The secondary connection is that the report likely solidifies a rate cut of 25 basis points at the September FOMC meeting.

The futures market, which was up ahead of the jobs report, retreated in its wake on what we would call an obligatory response to a soft headline number. Nevertheless, the cash market still has some room to pad this week’s gains, albeit modestly, when the opening bell rings.

The S&P futures, which had been up 24 points, are up 10 points and are trading 0.2% above fair value.

Originally Posted on September 6, 2019 – August Employment Report Generates Some Headline Disappointment

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