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09 02 2016 | by Victor Xing | Economics

August Payrolls: softer gains with limited policy impact

Summary of the August Payrolls

Federal Reserve communications since the Jackson Hole Economic Symposium have focused on cumulative economic progress in the U.S..  Under this macro backdrop, hawkish members of the FOMC would argue that a softer-but-respectable August Payrolls at 151,000 would do little to alter Fed’s progress toward its objectives, while softer readings in wage growth and lackluster improvements on broader labor market conditions would support dovish Fed Governors’ preference for patience.  Taken as a whole, the latest jobs data would give the Fed less impetus to act at the September meeting, but it is not a game changer.

Breaking down the August Payrolls

The August Payrolls came in below-consensus at 151,000 vs. 180,000 survey, with prior two months’ net revision mostly unchanged at -1,000.  Even though the headline labor force participation rate held steady at 62.8%, the 25 to 54 “prime age” cohort rose to 81.3% vs. 81.2% prior.  With subdued changes in the participation rate, it is not surprising that both U3 and U6 unemployment rate remained unchanged at 4.9% and 9.7%, respectively.  Involuntary part-time workers (for economic reasons) rose a touch to 3.80% vs. 3.73% prior.  Average hourly earnings pared recent gains at 2.43% YoY and 0.12% MoM (vs. 2.5% and 0.2% consensus), and long-term unemployed as a percentage of total unemployed declined slightly to 26.1% vs. 26.6% prior.

August Payrolls
U3, U6 and involuntary part-time workers

Labor market participation rate rose slightly in the 25-54 year cohort:

August Payrolls

Average hourly earnings declined (YoY at 2.43% vs. 2.5% survey, MoM at 0.12% vs. 0.2% consensus)

August Payrolls

Sector specific labor market conditions suggest a slight change in employment dynamics.  Local government hiring has been on an up-trend in 2016, and that momentum persisted into August.  Between January and August 2016, the Local Government Education sector ranked 5th in aggregate payroll gains at 71,000 (vs. 198,000 in the resilient Professional, Scientific, and Technical Services sector).  Local Government Ex-Education came in slightly behind at the 8th place with YTD job gains at 68,000 – a likely sign of easing fiscal conditions.

Indeed, New York Fed President Dudley referred to current fiscal policy stance as “mildly stimulative” in a July speech, an improvement vs. Chair Yellen’s assessment of prior period of “contractionary fiscal policy.”

Overall, the August NFP’s impact on monetary policy will be limited given entrenched policy divergence between Fed doves (led by Governor Brainard, Tarullo and Powell) and hawkish regional Fed Presidents.  Additionally, it will likely take more pessimistic data to dissuade policymakers from their current economic outlook, especially with Atlanta Fed’s 3Q GDP forecast at 3.5%, and the hourly wage tracker near post-recession high (next update in 2 to 3 weeks).  Finally, Boston Fed President Rosengren highlighted in May that “80K to 100K [in monthly job growth] is what we expect in the longer run.”

Chair Yellen, Vice Chair Fischer, and President Dudley will continue to play decisive roles in upcoming policy deliberations, and the latest data will not give them impetus to act with haste to resume policy normalization at the next meeting.  At the same time, the latest data also would not detract from Yellen’s Jackson Hole comment that “the case for an increase in the federal funds rate has strengthened in recent months.”


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