The Economy Slows a Notch

Just when most analysts were sure the pieces were in place for an interest rate increase in September (December at the latest), the monthly employment reports changed everything last Friday. The positive news is that the previous month’s large number of new jobs was revised higher, from 255,000 to 275,000.

But there were several disappointing items in the reports.

The number of new jobs created was only 151,000, when analysts were expecting a much higher number. The number of private sector jobs created was only 126,000. Adding to the disappointment is that most of these jobs were in traditionally low-wage industries. The last couple of monthly employment reports indicated most of the new jobs were in higher wage positions, such as professional services.

Two other data points, which are the ones I watch more closely, were even more disappointing. Average hourly earnings increased only 0.1%. That returns wage increases to the stagnant levels they held for much of the recovery. Since unemployment is very low and households generally can’t borrow against their homes to spend the way they used to, wage increases are the most likely source of new spending and economic growth for a while.

Paired with the modest earnings increase was a decline in the average workweek from 34.4 hours (which was revised down from last month’s original 34.5 hours) to 34.3 hours.

The reports also had the same two signs of weakness that have persisted since 2009. One sign of weakness is the high number of people who have part-time jobs, so they aren’t considered unemployed, but prefer full-time jobs they can’t find. Another sign of weakness is the low labor force participation rate. A good portion of this is due to the aging of the work force, but some of it also is due to people who’ve given up on finding jobs and left the workforce.

A puzzle in the labor market is that employers continue to report having a high number of positions they can’t fill. We also saw that in this week’s JOLTS (Job Openings and Labor Turnover Survey) reports. The report showed a sizable increase in job openings for July but no change in the hiring rate. The quit rate for employees also was unchanged.

Some analysts believe this is due to two factors. One factor is that today’s unemployed don’t have the skills employers want. Another factor is that the unemployed are unable or unwilling to move to where the jobs are. I’m sure those two factors explain some of the unfilled jobs. If those are the explanations, why aren’t employers raising wages to entice better applicants?

It’s also possible that online job services make it easy for employers to advertise jobs that are available and wait until the ideal candidate applies. Since workers aren’t able to leave jobs for higher-paying opportunities the way they could before 2008, employers can count on existing employees to take on additional responsibilities until the job is filled. There are many other factors to consider, and not enough research is directed at this issue. Here’s a good summary of possible reasons for the gap.

Despite the disappointment, the jobs reports don’t indicate a recession is imminent. I’ve always stated that too much attention is paid to these reports. The data is based on surveys. That makes them volatile from month to month and subject to revisions in coming months. Also, employment is a lagging, not leading, indicator of economic growth trends. The worst that can be said at this point is employers became a little more conservative lately. No doubt that’s the result of news reports about Brexit, the election and other factors. Other data also indicated some slowing in growth during the summer, but overall growth remains positive and near the economy’s long-term average growth rate.

The Data

There were a few other reports in addition to last week’s Employment Situation reports, discussed above.

Factory Orders rose 1.9% after declining 1.8% the previous month. That adds to the mixed data about the state of manufacturing. Core capital goods, which indicate business investment, were up 1.5%.

The service sector of the economy definitely slowed in the last month. The ISM Non-Manufacturing Index fell to 51.4, after reporting 55.0 last month. The current reading still indicates growth, because it is above 50.0. But it is a sharp decline and the lowest reading since February 2010.

The PMI Services Index, which consistently has been weaker than the ISM counterpart, held fairly steady at 51.0.

New unemployment claims declined by 4,000. That keeps the number near the historic lows.

The Markets

Stocks recovered some this week. International stocks led the way. The All-Country World Index returned 1.77% for the week ended with Wednesday’s close. Emerging market stocks returned 4.27%. The S&P 500 rose 0.75% as did the Dow Jones Industrial Average. The Russell 2000 returned 0.56%.

Long-term treasuries declined 0.05%. Investment-grade bonds rose 0.03%. Treasury Inflation-Protected Securities (TIPS) rose 0.58%. High-yield bonds returned 0.50%.

The dollar lost 1.13%.

Energy-based commodities gained 1.19%. Broader-based commodities gained 1.45%. Gold gained 2.86%.

Bob’s News & Updates

I have two appearances scheduled for the rest of 2016.

You can register for my Sept. 20 presentation to the Pittsburgh chapter of the American Association of Individual Investors (AAII). Details including registration information are here.

Soon, I’ll be providing free registration information for the new MoneyShow Dallas, Oct. 20-21.

Some Reading for You

This article says that most people who base investment decisions on whether or not stocks are overvalued are missing key points.

The troubles in the high-end housing market continue, says this report.

Here’s the story of a librarian who lived simply and was able to donate $4 million to the university at which he worked.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.