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03 04 2016 | by Victor Xing | Economics

February payrolls: a deep dive into the employment report

Strong job gains vs. slight reversal in wage growth

The highly watched February payrolls came in stronger than expected at 242,000 vs. 190,000 consensus and 172,000 prior (revised up from 151,000).  At the same time, combined upward revisions from December and January totaled 30,000.  There are a number of encouraging signs within the latest report:

  • U-6 (broader) unemployment rate and part-time workers for economic reasons (unable to find full-time work) fell, U-3 held steady despite more entrants into the labor force
    • Prime-age unemployment rates (for both female and male) have declined below 2002-2004 levels
    • It is worth noting that strong job gains from 2005 and 2006 were fueled by the housing bubble
  • Prime-age (25 – 54) and aggregate labor force participation rose rose further
February payrolls saw improvement in U-6 and involuntary part-time workers
U-6 unemployment rate declined to 9.7% from 9.9% prior, and percentage of involuntary part-time workers within the civilian labor force declined to 3.769% from 3.782% prior
February Payrolls: labor force participation rate continued to rise
Aggregate labor force participation rate (LFPR) rose to 62.9% from 62.7% prior, prime-age LFPR rose to 81.2% from 81.1% prior

Yet,  some areas of concern remain:

  • Average hourly earnings came in below expectations (-0.118% MoM vs. 0.2% survey) and reversed some gains from January’s strong reading
  • Average workweek fell, and average weekly hours declined to levels last seen during 2014’s “polar vortex” distortion
  • Percent of long-term unemployed amongst total unemployed rose further
  • Mining sector, especially the “support activities for mining” sub-sector continued to shed payrolls
February Payrolls: wage growth declined
Average hourly earnings fell: -0.118% MoM vs. 0.475% prior, 2.218% YoY vs. 2.504% prior
February Payrolls: long-term unemployed rose
Percentage of long-term unemployed as part of total unemployed at 27.7% vs. 26.9% prior
February payrolls: average weekly hours declined
Average weekly hours declined in February

There are many theories on the inconsistent wage growth, with debates reignited with every monthly fluctuation in average hourly earnings.  Fortunately, the payrolls data combined with Bureau of Labor Statistics’ wage estimates provides us an insight into wage dynamics in the U.S..

Wage dynamics within payroll sectors

Few would be surprised to see uneven job growth across payroll sectors, and some market participants have long articulated that a few sectors with brisk hiring also happen to offer lower wages.  Below is an analysis on the “guts” of the employment report and their likely impacts on wage growth.

Aggregate payrolls

“Trade, transportation and utilities” is the largest non-government payrolls sector on the basis of outright level of payrolls, and many investors are focusing on the higher-wage “professional and business services” sector.  A number of skeptical analysts have used job growth in the lower-wage “leisure and hospitality” sector to support their arguments that the labor market is merely optically healthy.

February Payrolls: analysis on payrolls and wages
Payroll sectors in the ordering of payroll count

Payroll growth (year-over-year basis) have been relatively stable in majority of sectors with the exception of mining and manufacturing:

February Payrolls: YoY changes in payrolls
Mining and logging led recent decline in payrolls

Mining and logging

“Support activities for mining” sub-sector is the largest constituent in the “mining and logging” sector.  This group include jobs such as “derrick operators, oil and gas,” “first-line supervisors of extraction workers,” “rotary drill operators,” and “roustabouts.”  According to BLS’ 2013 wage survey, these workers earned an average of $48,595 per year.

Thus, disappearing disposable income from this sector can have a profound knock-on impacts on business and communities benefited from the oil boom, which may have contributed to the decline in ISM non-manufacturing index – such survey reports tend to focus more on qualitative expectations versus NFP’s emphasis on the quantity of job gains.

February Payrolls: mining payrolls
“Support activities for mining” (largest sub-sector in “mining and logging”) led the decline in payrolls (in thousands)

February Payrolls

Professional and business services

The “professional and business services” sector may first appear to be a high-income category given market attention on lawyers, accountants, management analyst, etc ($101,556 average annual wage in the “professional, scientific, and technical services” sub-sector according to BLS’ 2013 data), but it is essential to highlight that lower-wage administrative and support service workers are also part of this category (thus diluting the argument of strong high-income job growth).

February Payrolls
“Administrative and support services” account for half of the “professional and business services” total payroll count

In comparison, “administrative and support services” sub-sector has an annual mean wage of $24,432, and its annual growth mirrors that of “professional, scientific, and technical services.”

February Payrolls

Leisure and hospitality

“Food services and drinking places” has been a powerhouse of job creation in recent years, and it is the dominant sub-sector within the “leisure and hospitality” category.

February Payrolls: a review on leisure and hospitality sector

“Food services and drinking places” include fast food workers, restaurant cooks, first-line supervisors and waiting staff.  The sub-sector has an annual wage of $20,786 as of 2013.

February Payrolls: job growth in the leisure and hospitality sector

It is reasonable to argue that current brisk pace of job growth masks a growing income divide amongst job seekers, and a number of these lower income occupations are at-risk from automation.  It is true that many workers are willing and able to re-tool, but this process will take time, and wage growth in affected occupations will likely remain soft.

Automation and job polarization

There is one school of thought that wages in sectors such as “administrative and support services” would remain under downward pressure as industries utilize technology to replace middle-skill office workers (i.e. job polarization).

“Nonroutine manual” job growth in the following chart can be explained by growth in sectors with lower wages, and its boosts to wage growth may happen later and at a slower pace than in “nonroutine cognitive” sectors, especially if they account for a large percentage of hiring.

February Payrolls
Source: Federal Reserve Bank of Dallas Economic Letter, May 2014

Policy implications

Federal Reserve policymakers have placed strong emphasis on cyclical factors affecting unemployment and underemployment (labor market slack), which can react to accommodative monetary policy measures.

However, if underlying wage growth is in-fact constrained by structural reasons (insensitive to stimulative policy measures), then current reflationary policies would likely have limited effects on wage growth (two-speed wage growth would manifest as below-expectation wage growth on aggregate indices).  Under this scenario, an eventual rise in wage growth would likely be accompanied by a secular rise in realized inflation (inflation expectations would trend with energy prices), and the policy battle onward may resemble that of Paul Volcker instead of Ben Bernanke.

Nevertheless, financial market participants would prefer to assess impacts of the latest payroll on near-term Federal Reserve policies, and expectations of less dovish FED policy have erased much of the rally in front-end interest rates seen in the month of February:

Front-end Eurodollar futures (March 2017) have erased their February rally on stronger-than-expected PCE, oil price stabilization, as well as the latest February NFP
Front-end Eurodollar futures (March 2017) have erased their February rally on stronger-than-expected PCE, oil price stabilization, as well as the latest February NFP

Next article03 03 2016 | by Victor Xing | Economics

February ISM: services cool as manufacturing stabilize