Each month the government issues the monthly employment report. This report consists of two separate surveys, one for households, and the other for businesses.
The household survey is the one where the unemployment rate is derived. The business survey is the one frequently cited for employment growth, though the household survey also calculates net job creation.
Of all the various economic reports, the monthly employment report tends to be the most closely followed. Frequently the employment report can cause significant changes in both the bond and stock markets, if it deviates significantly from expectations.
The report that came out on Oct. 2 for the month of September was weaker than expected. The unemployment rate stayed constant at 5.1%, which was no major surprise.
However, the payroll survey showed an increase of 142,000 net new jobs, while expectations were closer to 200,000.
On the surface, one month coming in weaker than expected is normally not that big of a deal. These numbers are just surveys, and adjustments are made for seasonal factors. Therefore, some variance is purely statistical in nature, and isn’t necessarily reflective of underlying economic trends.
To determine if this shortfall in job creation is meaningful it is necessary to look at additional figures. Normally someone would want to look at data for several months. In July and August job growth was revised lower by 59,000 for the two months combined. In addition the new revised figure for August with 136,000 net new jobs is even less than the September figure. This would imply that the September results were not an aberration.
Furthermore, the labor force participation rate continued to fall. It is now at its lowest level since 1977. Other pieces of data, such as wage growth and the average workweek, also registered fairly disappointing results.
There was another employment survey released last week by ADP, which measures private employment, which showed job growth of 200,000. The ADP number for August was 184,000 net new jobs, which was also higher than the government report. Financial markets generally give more weight to the government report, but the ADP results do offer a decent comparison, since over time these two reports are generally fairly close.
What appears to be happening is that the goods producing side of the economy is starting to slow. This was confirmed by the monthly survey on manufacturing by purchasing managers, which has been gradually slowing in recent months. The manufacturing side of the economy is tied more to the global economy, which has shown some signs of weakness, notably in China.
Services in the United States are considerably larger than manufacturing, and continues to show growth. The services side of the economy is not impacted by global events to the extent that manufacturing is.
Over much of this year job growth has averaged close to 200,000 per month. Normally we need to add about 100,000 net new jobs per month to keep the unemployment rate stable to account for a growing labor force. At 5.1% the unemployment rate is not likely to fall much further, though the participation rate could increase if some discouraged workers reenter the labor force.
This weaker employment report will likely cause the Federal Reserve to maintain its 0 interest rate policy a little longer, as it is doubtful a change will be made at its next meeting in late October. A rate increase is still possible in December, but we would likely need to see somewhat better economic figures for that to happen. This implies that borrowing costs for consumers, notably auto and mortgage loans will remain at very low levels a little longer.
The day the employment report was released was very interesting for the stock market. It opened down over 1% on the news, but then later reversed course during the day and finished up over 1%. This would imply that the market recognizes that the economy has weakened somewhat, but probably not enough where a recession would be likely.
Volatility in the stock market remains at elevated levels. Uncertainty about the economy is certainly adding to the unease of market participants. While it does appear that job growth is slowing some, it is highly unlikely that we are close to experiencing anything like the major recession that occurred in 2008.
