Why the latest jobs numbers are even stronger than they appear
As we count down the days until Fed Chair Janet Yellen testifies before Congress this week and Q2 earnings season begins, it’s worth a deep dive into the latest government jobs numbers, as they reveal pockets of strength that could shape the future earnings picture as well as Fed monetary policy.
Clearly, the June Employment Situation report released on Friday was stronger than expected. Given the positive payroll surprise, investors bid up US equities on Friday despite a very weak showing by the broader markets and by the tech sector in particular on Thursday. Friday’s punch higher also managed to put a positive patina on a week that largely saw prices and investor conviction beginning to waver.
The top line employment gains for the month of +222k versus consensus expectations calling for a more modest +170k is very important, as it speaks to a re-acceleration in job creation. It also came just when many economic data points appeared to be suggesting that we may have been heading into a quarter-end economic slowdown.
The improvement in June’s employment data versus May’s unrevised reading of +138k spoke to that—in effect reassuring investors that our expansion remains in-channel. As if to underscore that theme, the previous two months were also revised higher by a total of 47k. Those revisions for April and May, in conjunction with June’s numbers, put to rest any concern of a slowdown in our expansion … for the time being.
The official unemployment rate did tick higher from 4.3% to 4.4%, but that was driven largely by the fact that the long-term unemployed are increasingly attempting to re-enter the work force—another positive.
Within the report itself, there were additional indications that our employment landscape continues to improve. Much of that improvement has been and remains tied to the service sector, which added a solid 35k positions in the period. Service sector jobs tend to be of a professional nature and, as a result, are considered higher quality adds. The temporary positions vertical, which is often looked as a forward-looking indicator for growth, added a solid 13k in the month. Even the beaten up retail sector added positions (+8k). Government jobs unexpectedly expanded by 35k—the most in 2017. Construction (+16k), mining (+8k) and even manufacturing (+1k) were all positive for the month.
If there is a weakness in the June Employment Report, it can be argued that it resides in average hourly earnings data, which rose by a scant 0.1% month-over-month. However, on a year-over-year basis, average hourly earnings have registered a sustainable and healthy gain of 2.6%. Additionally, the labor force participation rate remained at 62.7%. Though unchanged, it does appear to have finally leveled off in 2017—certainly a constructive theme.
All in, the top line gains of 222k posted in June’s Employment Report were merely the tip of a very constructive release—one that will likely keep the Federal Reserve in-channel to raise once more in 2017, as the broader economy continues to gain traction in the second half.
That said, I continue to expect to see more weakness in the large-cap tech (XLK) and software verticals in the coming days. That weakness will continue to weigh on the overall market, making meaningful gains from these levels a bit more challenging. Second quarter earnings season, which begins this week, may provide for a counter argument. Financials (XLF) will be in that driver seat this week.
