Thursday, July 03, 2014 - Jobs Report Thursday

Jobs Report Thursday

DOW + 92 = 17,068
SPX + 10 = 1985
NAS + 28 = 4485
10 YR YLD + .02 = 2.65%
OIL - .42 = 104.06
GOLD – 7.60 = 1320.60
SILV - .02 = 21.23

Record high closes for the Dow and the S&P 500.

The first Friday of each month is typically a big day for economic data because the Labor Department releases the nonfarm employment report. I have always considered this to be one of the most important economic reports because jobs make everything happen; it’s the stuff of work and production and a driver of capital, and sweat and blood. So, we spend extra time to really dig into the jobs report, which was released today because tomorrow is a holiday.

This was a very good jobs report. The economy added 288,000 net new jobs in June and the unemployment rate dropped from 6.3% to 6.1%; that’s the lowest unemployment rate since September 2008. The report topped estimates of 215,000 jobs. The jobs reports for April and May were revised higher; April was revised from 282,000 to 304,000 net new jobs; May was revised from 217,000 to 224,000 new jobs; meaning there were 29,000 more jobs than previously reported.

June marked the best five-month stretch of job creation since early 2006; for the past five months the economy has added at least 200,000 jobs per month. The three-month average rate of hiring in the second quarter now stands at 272,000, compared with 190,000 a month in the first quarter.

The economy has added private sector jobs for 52 straight months. During this span, 9.7 million private sector jobs have been created. Over the past 12 months, the economy has added 2.495 million jobs; and year-to-date the economy has added 1.385 million job; and 2014 is on track to be the best year for job growth since 1999.

Total employment is now 415,000 above the pre-recession peak; and private employment is now 895,000 above the previous peak; the difference between private and total is the loss of government jobs, which has been like an anchor dragging down total employment. State and local governments added 24,000 jobs last month; state and local government employment is up 138,000 from the bottom but still more than 600,000 below the peak. The federal government added 2,000 jobs in June but federal employment is still down 23,000 for the year.

Breaking down the government jobs a bit further, the improvement likely reflects a stabilizing financial outlook for municipalities. When home prices crashed, it cut into the tax base of cities and counties, and the response was to lay off workers. A return to government hiring, even a modest increase could have long term benefits from investment in education and infrastructure.

More than 7.5 million people are employed part-time for economic reasons; this number is up 275,000 in June, although the trend has been and remains down for the year. People who are working part-time because their hours have been cut back or they can’t find full-time employment are included in an alternate measure known as labor underutilization or U-6. The U-6 rate decreased to 12.1% in June from 12.2% in May; and this is the lowest U-6 reading since October 2008.

Full-time employment suffered its third-largest single month-over-month decline since the recession ended; 523,000 full-time jobs were lost while a stunning 799,000 new part-time jobs were added in June. Part-time workers again account for more than 18% of the total workforce, a level that has remained relatively stable since the recession, despite efforts to deny the truth that this is a "part-time" recovery. Part-time jobs had been in rapid decline over the past year, but June's spike cancels out that shift. There are now almost exactly as many part-time workers (28 million) as there were a year ago.

The Labor Force Participation Rate was unchanged in June at 62.8%. This is the percentage of the working age population in the labor force.  We would like to see the participation rate increase, meaning more people are looking for jobs, but a large portion of the recent decline in the participation rate is due to demographics; people are retiring and won’t be re-entering the labor force. The Employment-Population ratio increased in June to 59.0%.

The unemployment rate is calculated by dividing the number of people who are unemployed by the total number of people working or looking for work. The best way for the rate to fall is for the number of unemployed to drop because more people found a job, but it can also decline when people give up looking for work altogether. Still, the jobless rate dropped to 6.1% and that’s because more people found work, not because more people were dropping out of the labor pool; so the jobless rate fell for the right reasons.

As the labor market recovers, it creates a challenge of more people re-entering the labor pool. If more people re-enter the labor pool, the unemployment rate could go up, even as the economy adds jobs. But that hasn’t happened; rather, the number of unemployed who were re-entering the labor pool actually fell in June.

The number of long term unemployed workers has dropped by 1.2 million over the past year but there are still just over 3 million workers who have been unemployed for more than 26 weeks and they are still trying to find work; this is down from over 3.3 million people in May. There are many long term unemployed who may never get jobs again, and the longer they go without jobs, the tougher it will be. And more jobseekers gave up looking for work than found a job, for the 49^th time in the past 50 months. This is surely a demographic shift, but it also means we’re losing the skills and productivity of some of the most experienced workers.  For people who are finding jobs, the median duration of unemployment continues to drop rapidly, from 25 weeks coming out of the recession to just 13.1 weeks today.

Long term unemployment and underutilization indicate that there is still significant slack in the labor market, even though some companies are now beginning to report that they are having to compete to find workers.

So far, the trend has not resulted in higher incomes. Average pay has grown just 2% during the recovery, barely matching inflation and below the long term trend of 3.5%. Last month, the average hourly wage for private-sector workers rose six cents to $24.45. If workers earn more money, they’ll spend more money and that is a boost to the overall economy. The silver lining to the weak wages is that there is no wage inflation, so even though the jobs picture is improving, wage inflation should not influence the Federal Reserve.  Even if hourly wages aren’t moving much, there was a small pickup in the average work week and aggregate hours worked grew by a fairly strong 3.8% annual rate in the last quarter.

Job gains in June were widespread. Retailers added 40,200 workers last month. Financial and insurance firms increased their payrolls by 17,000. Restaurants and bars employed nearly 33,000 more people. Higher-paying sectors continued to lag behind in the jobs recovery. Factories added 16,000 workers, and construction added 6,000 workers, which would not be considered particularly strong. Factory payrolls have increased for 11 consecutive months, adding a total of 139,000 new jobs, well below the target of one million manufacturing jobs for the year. Factory payrolls remain a shadow of their former selves, but the revival in manufacturing is finally creating more job opportunities on the factory floor.

Shrinking unemployment and growing payrolls are always good signs for a stronger economy. However, the nature of these changes matters. If unemployment is low primarily due to labor force dropouts, and if employment growth is being driven by hundreds of thousands of low-earning part-time workers rather than growth in valuable and decent paying full-time positions, it means that the economic recovery still faces a hard slog.

The jobs report was far from perfect but it was very good and it should lead to growth in the economy for the second quarter. So today, stocks had another good day. The Dow closed above 17,000 for the first time ever. The S&P 500 is closing in on 2000. The Nasdaq is back to its highest level since 2000. Bonds dropped. And that is an ongoing trend, the markets race along while workers trudge.