August Job's Report Was Good, But Not Flawless

Posted by jbrumley on September 7, 2018 4:15 PM

Unshockingly, Friday's jobs report - a look at August's employment picture for the U.S. - was another encouraging one. The unemployment rate held steady at 3.9% (which is at or near the absolute low) on the back of 201,000 newly-created positions.

It was a report that was once again politicized, obscuring the true state and implications of the numbers. Looking past the smoke and mirrors though, there are only two overarching conclusions that traders need to walk away with. One is, economic strength is not only driving strong employment, it's driving real wage growth... and has been for a while. The other is, the Fed is right to be concerned that strong wage growth could turn into strong inflation. That's also been the case for a while though.

As the cliche goes though, let's begin at the beginning, looking at the updated trend for the unemployment rate figure, and the job-growth trend,

A figure of 201,000 payrolls isn't earth shattering. In light of months (and months) of net-growth though, we're not going to add a whole lot of jobs in one shot. Ergo, we're not going to push the unemployment rate any lower. The measure of progress here is the quality of the jobs being gained, and the subsequent paychecks being collected.

The graphic below, just so you know, plots hourly wages and the average length of the workweek, but doesn't reflect August's numbers. Tack on an extra 0.4% to whatever the average hourly pay was for July, and that's August's pay. By the way, that 0.4% improvement was the strongest single-month progress we've seen in nearly a decade. Employers are increasingly being forced to pony up, as workers have more than a little bargaining/pricing power.

Last month's pay raises pushes the average hourly pay to record levels.

It's interesting though. While we've seen nothing but forward progress for years now from the data points that are rarely touted, past the noise of a seemingly strong jobs report, we saw that data get dented and dinged a bit. The number of people with jobs actually fell from July's peak, and the number of people that were not counting themselves as officially unemployed inched to a multi-month high of 5.4 million. Yet, the number of people who are officially unemployed (and therefore eligible for unemployment benefits) continued to trend lower, reaching 6.2 million.

It's an indirect indication that people who are leaving jobs are doing so voluntarily.

It's also worth noting that August - and September - often see works furloughed, or in some cases students are forced to leave jobs to return to school. Point being, one slow month isn't in and of itself a reason to panic. Two slow months isn't either. If last month's headwinds continue to take a toll on the total number of people working or pushes the number of people who want jobs but don't have one even higher, it's something to at least mull.

Finally, given last month's raw numbers of people who are employed or not employed, we saw sizeable pullbacks in the labor force participation rate and the employed/population ratio. These lulls came at a time when it seemed like they shouldn't.

Again, it's not a catastrophe. One slow month isn't a trend, and much of that lull was made by choice. Still, just for added certainty, we'd like to see all the numbers inch higher.

All in all we'd have to give the August jobs report a B, and maybe even a B+, given the backdrop. That is, corporate earnings continue to grow, and Q3's GDP is going to be ridiculously strong. It's far from perfect though.

As for wage growth that could drive serious inflation, certainly that's a concern, but not yet a worry. The Federal Reserve has already telegraphed its plans to ratchet rates upward for the next few quarters, steadily, but slowly. The market - equities and broad economy - have already factored that in (whether people know it or not). We likely will see wage inflation turn into consumer inflation, but it won't up-end the economy the way some doomsdayers have enjoyed describing.