Note: This post first appeared on Patreon on 1 Jun 2018
The jobs report released this morning in the US confirms the upbeat view that initial jobless claims data have been sending. While the participation rate remains weak, the headline and comprehensive unemployment figures have touched cycle lows. And job growth is still robust, despite the length of this business cycle. Some comments follow below.
You’ve probably seen the most important numbers by now. Let me highlight the most important figures and the takeaways.
- The unemployment rate: the headline rate ticked down another notch to 3.8%. What’s important to remember about this number is the impact it has on policy. The Fed’s interest rate forecasts are predicated on a year-end number of 3.8. Yet, here we are at 3.8% in May. That means the likelihood of a 4th rate hike in December has now risen.
- Non-farm payrolls: For me, the actual number is meaningless because it fluctuates month-to-month. The real question is the trend. And that is now slightly up. While the 12-month change in non-farm payrolls peaked at 3.1 million in February 2015, it started this year at 2.1 million and has risen slightly to above 2.3 million. That’s a sign of continued employment strength.
- Labor force participation rate: The unemployment rate is measured using a household survey, while the non-farm payrolls data comes from an establishment survey. So the unemployment rate is positively affected by people dropping out of the workforce, lowering the labor force participation rate. And, indeed, the numbers were flattered by a drop in labor force participation from 62.8% in April to 62.7% in May.
- Broad unemployment level: The U-6 number includes a lot of people who are not technically unemployed but whose employment situation is undesirable. It is the total number of unemployed, plus all marginally attached workers plus the total employed part time for economic reasons. So it captures data the headline number doesn’t. That number bottomed in the October 2000 at 6.8%, hit a cycle low of 7.9% in December 2006 and now rests at this cycle’s low of 7.6%. The fact that broad levels of unemployment keep falling will make policy makers less worried about the participation rate.
- Wage growth: We saw average hourly earnings tick up 0.3% in May, taking the 12-month change to 2.7%. That’s not a great number in comparison to the last two previous business cycles when adjusted for inflation. But it is a decent number. And that gives the Fed no reason to pause regarding the pace of wage growth.
This was a good report. That’s why Trump frontran the report and tweeted in anticipation of it at 7:!3 this morning. The White House has confirmed that had advanced knowledge that it would be good. Going forward, remember that if Trump doesn’t tweet about a report, markets will now react, anticipating bad news.
The biggest positive takeaway is that trend growth in non-farm payrolls is heading up. For me, it suggests that the economy has legs, and that 2018 is not a year we have to worry excessively about downside economic risk.
For the investment-minded of you, I will have more on how this report affects markets and what recent Fed comments suggest about the rate hike cycle.