The employment situation is a set of labor market indicators. The unemployment rate measures the number of unemployed as a percentage of the labor force. Nonfarm payroll employment counts the number of paid employees working part-time or full-time in the nation's business and government establishments. The average workweek reflects the number of hours worked in the nonfarm sector. Average hourly earnings reveal the basic hourly rate for major industries as indicated in nonfarm payrolls. (Bureau of Labor Statistics, U.S. Department of Labor) Why Investors Care
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Highlights
Employment in August came in quite weak, posting a decline for the month and with downward revisions to the prior two months. Household data remained tight. Nonfarm payroll employment fell by 4,000, following revised gains of 68,000 in July and 69,000 in June. August's payroll increase was sharply below the consensus forecast for a 100,000 advance in payrolls. July's payroll number was revised down 24,000 from the initial estimate of 92,000 and June was revised down 57,000 from the previous estimate of a 126,000 boost. For July and June combined, the net revision was down 81,000. August's decline is the first since a 42,000 drop in August 2003.
On a year-on-year basis, nonfarm payroll employment rose 1.2 percent in August, down slightly from up 1.3 percent in July.
Within the payroll survey, weakness was primarily in the goods-producing industries. Manufacturing fell a sharp 46,000 in August, following a 1,000 decline in July. Construction declined 22,000 in the latest month, following a 14,000 drop in July. Natural resources & mining edged up by 4,000 in August after rising 5,000 the prior month.
Overall service-providing industries advanced 60,000 in August, after increasing 78,000 in July. Service-providing gains were led by education & health services, up 63,000; trade, transportation & utilities, up 12,000; and leisure & hospitality, up 12,000 . Government jobs fell 28,000.
On the inflation front, average hourly earnings increased 0.3 percent in August - the same as in July. The consensus had forecast a 0.3 percent increase in wages for August. The average workweek in August was unchanged at 33.8 hours and matched expectations.
Aggregate hours in manufacturing declined 0.3 percent in August, following a 0.2 percent dip in July. August's figure suggests a weak industrial production number for the month.
Turning to the household survey, the civilian unemployment rate was unchanged at 4.6 percent in August and came in below the market forecast of 4.7 percent. Household employment, the number of unemployed, and labor force all declined in August. Household employment fell 316,000 in August, following a 30,000 dip in July. The labor force declined by 340,000 in August, while the number of unemployed fell 24,000. The household survey numbers are much more volatile than the payroll survey data because of the household survey's much smaller sample size.
Overall, today's report adds ammunition to those arguing that the Fed will ease at its September 18 FOMC meeting. The Fed has wanted to see a slowing in the economy and the August payroll data and revised numbers for June and July add to the argument that the economy is slowing. However, there are still data to the contrary - such as more recent initial unemployment claims data, moderately strong chain stores sales, and even auto sales. The Fed clearly puts the payroll numbers in the column for easing arguments but will still be watching upcoming claims numbers before the September 18 FOMC meeting. Both the bonds and equities markets are likely to like today's report because of the increased odds for Fed easing.
Nonfarm payroll employment increased by 92,000 in July, after posting advances of 126,000 in June and 188,000 in May. However, most of the softening in payrolls in July was in a 28,000 drop in government payrolls. Private payrolls rose by 120,000 in July after a 107,000 boost in June. The decline in government jobs primarily was in local and state government education categories that can have difficult-to-adjust seasonal swings at the start or end of summer. On the inflation front, average hourly earnings increased 0.3 percent in July, after posting a 0.4 percent boost in June. Turning to the household survey, the civilian unemployment rate edged up to 4.6 percent in July from 4.5 percent the month before. Markets will be giving the August employment report heavy scrutiny given that it will be one of the key reports that may tip the balance on whether the Fed cuts interest rates at its September 18 FOMC meeting. What could keep the Fed on hold - perhaps a payroll gain over 120,000, a dip in unemployment, and/or rise in average hourly earning of 0.3 percent or more.
Nonfarm payrolls Consensus Forecast for August 07: +100,000
Range: +35,000 to +150,000
Unemployment rate Consensus Forecast for August 07: 4.7 percent
Range: 4.6 to 4.8 percent
Average workweek Consensus Forecast for August 07: 33.8 hours
Range: 33.8 to 33.9 hours
Average hourly earnings Consensus Forecast for August 07: +0.3 percent
Range: +0.2 to +0.6 percent
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During the mature phase of an economic expansion, monthly payrolls gains of 150,000 or so are considered relatively healthy. In the early stages of recovery though, gains are expected to surpass 250,000 per month. |
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The civilian unemployment rate is a lagging indicator of economic activity. During a recession, many people leave the labor force entirely, so the jobless rate may not increase as much as expected. This means that the jobless rate may continue to increase in the early stages of recovery because more people are returning to the labor force as they believe they will be able to find work. The civilian unemployment rate tends towards greater stability than payroll employment on a monthly basis. It reveals the degree to which labor resources are utilized in the economy. |
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