August’s Employment Report, released Friday, provided additional data-centric support for the long running narrative that speaks to sustainable economic expansion and the likelihood of higher equity prices in coming months.
Employment Situation
Nonfarm payrolls M/M 210,000 versus July’s revised 147,000
Unemployment Rate Level 3.9% versus July’s 3.9%
Private Payrolls M/M 204,000 versus July’s revised 153,000
Manufacturing Payrolls M/M -3,000 versus July’s revised 18,000
Labor Force Participation Rate 62.7% versus July’s 62.9%
Average hourly Earnings Y/Y 2.9% versus July’s 2.7%
Though the manufacturing totals for August were well below trend, in fact negative, the street mainly looked past them. The two-tenths of a drop in the LFPR also did not appear to concern investors. Instead, the focus Friday was on the Average Hourly Earnings component of the August Employment Report – on a year-over-year basis. They rose to 2.9% from July’s 2.7%.
Rising wages, or the lack of them in recent years, has been a sticking point for investors as they gauge the benefits of our economic expansion through the lens of income distribution. Wages and the rate at which they rise or fall, are also a key component in how inflation is measured. Rising wages are a lagging indicator of the health of the job market and one that is in many ways nearly as subject to political discourse as the official unemployment rate. August’s tick higher in the LFPR to 2.9% is a delayed indication which suggests what we already know – the job market is tight. We can see that in both the four-week average of jobless claims, which are at their lowest level since 1969, and also in the internals of the latest Employment Report.
Employment gains by nearly every subsector of the report are historic. Record or near record low unemployment rates currently exist for African Americans, Hispanic Americans, Asian Americans, and females.
The strength posted in August’s Employment Report is buttressed by nearly all of the data we have received for months.
The latest Q2 GDP estimate which was revised higher, from 4.1% to 4.2%, is but one such data point. Further, consumer confidence, business sentiment, energy production, and consumption, all reflect healthy economic expansion. Additionally, housing construction and home prices, construction spending and business investment all point in the same direction.
Federal Reserve monetary policy has remained proactive, consistent, patient and deliberate in recent quarters. That said, the strength we are witnessing in the economy does speak to the need for additional tightening over the next 12 months. Dallas Fed President Rob Kaplan indicated on Friday that he thinks the August Employment report makes a case for additional 3 – 4 moves by the Fed over the coming 12 months.
Is the economy’s current velocity of expansion robust enough to withstand much more additional tightening over the coming year? Investors do not seem to be too worried about it. That lack of concern on the part of investors is largely attributable to not only the broad nature of our expansion as currently framed, but also to expectations for significant EPS and revenue growth on the part of corporate America – S&P component companies specifically.