“There are lies, there are damn lies
and there are statistics.”
The challenge for Bond Squad is to ascertain which set of statistics are the greatest prevaricators.
August Nonfarm Payrolls data indicate that the economy added 142,000 jobs (134,000 in the private sector). This was down from a prior revised 212,000 (up from 209,000) and well below the Street consensus of 230,000. The two-month net revision for Nonfarm Payrolls was -28,000. Manufacturing jobs flat-lined, adding no net new jobs. The Unemployment Rate fell to 6.1% due mainly to job gains among teenagers and shrinking labor force participation. Annual Average Hourly Earnings rose 2.1%, in line with the Street consensus and unchanged from a prior revised 2.1% (up from 2.0%). Average Weekly Hours were unchanged at 34.5. Labor Force Participation fell to 62.8% from a prior 62.9%.
Why such a weak jobs number? The first thing which comes to mind is the auto sector. Automakers did not shut down assembly lines as they have typically done in summers’ past. The result was no jump in auto hiring which typically occurs in August. NFP seasonality formulas are designed to account for such events. Although market bulls were quick to point to autos, that does not fully account for the large miss.
There could be trouble brewing in the service sector. Service sector businesses added 112,000 jobs in August. This was down from 146,000 in July and 226,000 in June. The retail trade sector actually shed 8,000 jobs after adding 21,000 jobs in July and 35,000 jobs in June. A knee-jerk reaction might be to assume that the stronger numbers in June and weaker numbers in August were the result of summer hiring and end of summer seasonal layoffs. What readers need to remember is that NFP data is seasonally adjusted. Unless the seasonality formulas are seriously broken, summer hiring and firing should have been accounted for. Most sectors of the economy added fewer jobs in August than in July. Every sector, with the exception of government and healthcare, added fewer jobs than in June.
The debate is raging over whether or not August jobs data is an outlier or the start of a new trend. We believe it is an outlier, but do not believe that the underlying trend is especially robust. Our view is that structural job growth (given U.S. fiscal policies, global economics, technology and demographics) is somewhere just north of 200,000. However, we must acknowledge that easy monetary policy is a factor. Begin raising the Fed Funds Rate and economic performance would probably be different. This is not to say that pace of growth would change much, but how and where jobs are created could be different. Economic and (especially) equity market bulls argue that it is corporate profits rather than Fed Policy which is responsible for asset price performance. However, we cannot discount the positive effects cheap financing can have on corporate profitability.
Growth on a Plain
A month or so ago, we opined that the pace of U.S. economic growth might have plateaued. Prior to today’s report, JP Morgan Chief Economist, Michael Feroli said about the pace of job growth:
“In the coming quarters, we should see some slowing.”
We believe Mr. Feroli could be proved right. Bond Squad’s view is that the domestic labor market might be close to being as tight as it can get. Yes, there are jobs for which businesses are having difficulty finding qualified candidates. However, the need to hire is not pressing enough to force an increase in wages. Technology and foreign labor give many businesses viable alternatives to increasing wages.
We were not of the opinion that the Fed was going to be in a position where it had to move up the pace of tightening. Not only was inflation not expected to be a problem, but the group of voting FOMC members in 2015 is going to be more dovish in nature than the current group. Our view is that the Fed will probably begin tightening not before mid-2015. Today’s data probably means that Fed Hawks had their wings clipped heading into the FOMC meeting in two weeks.
Bond Squad’s view is that job growth will probably average somewhere around 200,000 and both CPI and wage growth could trend right around 2.0%. On the surface, this appears as good news for risk assets, but it really depends on how risky the asset. More on this in this weekend’s “In the Trenches” report.
By Thomas Byrne – Director of Fixed Income – Investment Consultant
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.
- November 2012 – Present, Wealth Strategies & Management LLC, Stroudsburg PA
- December 2011 – November 2012 – Bond Squad, Kunkletown, PA
- April 1988 – December 2011, Citigroup and predecessor firms, New York, NY
- June 1986 – March 1988 – E.F. Hutton, New York, NY
Director of Fixed Income
Wealth Strategies & Management LLC