September 04, 2015
August Employment Report
"We've hit full employment, so is anyone surprised that firms are having trouble finding qualified workers to hire?"
Key Data: Payrolls: +173,000; Revisions: +44,000; Private Sector: 140,000; Manufacturing: -17,000; Public Education: +32,600; Unemployment Rate: 5.1%; Hourly Wages: +0.3%
In a Nutshell: "We've hit full employment, so is anyone surprised that firms are having trouble finding qualified workers to hire?"
What it Means: Yesterday, I worried that today's report would be in that middle ground where the Fed could either use it to defend a rate hike or say it needs to see more. Well, on the surface, that is precisely what we got. On the disappointing side was the payroll gain, which came in below expectations. But the possibility of a light report was discussed as August tends to be a difficult month for government to estimate payrolls and there have been many revisions in the past. I suspect this year will be no different, especially since there were sharp upward revisions to both June and July's totals. And, if you consider the past three months, the 221,000 average gain is in line with expectations. As for details, the huge decline in manufacturing was what tripped me up. Most of the drop came from the metals and food manufacturing industries. Vehicle makers ramped up hiring. With retail sales rebounding, vehicle demand soaring and housing accelerating, the cut backs should reverse very quickly. Meanwhile, the oil sector keeps downsizing. Mining is down 90,000 workers so far this year. In comparison, mining added 42,000 positions in 2014.
While payrolls disappointed, the unemployment situation didn't. The unemployment rate declined to its lowest point since March 2008. While the labor force fell, there was a huge rise in the number employed, a major decline in the number unemployed and the labor force participation rate remained stable again. Hourly wages rose solidly, hours worked were up so total weekly earnings soared. It looks like firms are working people longer because they cannot find workers to hire.
Markets and Fed Policy Implications: Though some of today's numbers were less than stellar, this was a very good report. Even at 173,000 a month, the unemployment rate will decline, so the payroll data are not weak. We are essentially at full employment and the wage gains should be sustained. Companies may be forced to move people from part-time to full-time. The secular trend toward depending more on part-timers may be slowed or even reversed as the reserve army of the unemployed/underemployed keeps shrinking rapidly. The alternative is to start paying up for new workers, which few firms still think is necessary. And it is unclear how many of those still looking for full-time work have the requisite skills to fill the openings. So forget U-6 and discouraged workers and participation rates falling (which it has been doing since April 2000!). This labor market is tight. Period. So, what will the Fed do? Wages are rising, incomes are growing and full employment is here. There is no labor market weakness for the Fed members to fall back on. Was this report strong enough to force a rate hike in September? No. Is it strong enough to support one? Yes. Will the Fed raise rates in September? I think they should and I expect they will, but this Fed has done a great job of obfuscating its intentions, so who knows?
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