Monday, August 4, 2014

Thoughts on Jul. '14 employment and ISM figures ...

BLS Employment Report (Jul. '14)

Change in NFP for Jul. '14 came in practically in the middle of the range between our 190K estimate and the 233K Street consensus; 209K.  Even with prior two months' upward revisions of 15K, the July NFP was considered disappointing, although it remained above 200K.   

As we expected, government jobs helped by adding 11K to the NFP.  Surprisingly, manufacturing was very strong, adding 28K jobs, mostly related to automobiles.  Jobs in retail also came in above expectations, having added 26.7K in July.  As always, health care and social assistance kept 'helping the economy' by adding 21K jobs.  

Participation rate went up by 10bps from the prior month, but remains at historically low levels.  It likely pushed up the official unemployment rate to 6.2%, from June's 6.1%.  The U-6 unemployment rate also increased by 0.10% to 12.2%.  

Average weekly hours stayed at 34.5, and although average hourly wages went up by only a penny from June, they were up nearly 2% from a year ago.

In addition to wage growth, other employment costs have gone up.  According to the Q2 ECI (released last Thursday), while total Q2 compensation increased by 2% Y/Y (not seasonally adjusted), the benefits component rose by 2.5%.  We are highlighting this because we think accelerated growth in benefits, most of which are costs for employers, may slow down hiring going forward.  And if it does not, then it will very likely lead to price hikes, or higher inflation rates, which means Yellen might begin raising rates sooner than expected.  

If wage growth remains at a modest rate, it will not necessarily help boost consumption of non-necessities by the middle and lower classes.  Consumption by the top 10% will not move this economy forward much longer, in our opinion.  Unfortunately, there are two things keeping wages from rising: 1) higher health care costs (and no, we are not taking any political position on this topic), and 2) fear of inflation which will make capital less accessible for corporations.  In other words, while companies are hiring more to accommodate overall growth, they certainly understand that bad news remains good news for the equity market, their shareholders, their self-defined "Non-GAAP" earnings, and access to capital.  By the way, even with the recent so-called 'pull-back', we still think the overall equity market is overvalued as the QE premium remains priced-in.  We will post our next 12-month valuation of the S&P 500 during the coming week.  

ISM Manufacturing

On the ISM manufacturing front, that figure came in at 57.1, a bit higher than our 56.6 estimate, and well above the Street's 56.0.  The spike in employment sub-index was expected.  However, increases in new orders, production, and backlog were surprising to us.  We think the significant decline in inventories was one of the main reasons new orders spiked up, as growth in backlog and production were not nearly as significant.  We look for ISM manufacturing to get back down to the 53 - 55 range in August. 

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