The widely anticipated August Unemployment Report covering the month of July was just released. Let’s dive right in and take a look at the numbers . . .
LD: This number is surprising on its face, as expectations were for the rate to move to 9.6% or 9.7%. What happened? Overall, this report does certainly reflect a growing sense of stability in employment BUT this figure also reflects the fact that 422k people have left the labor force, meaning they have given up looking for work. Long term unemployed rose by 584k and now exceeds 5 million people. As time goes by, more and more of these people will stop receiving unemployment benefits.
May: loss of 519k
June: loss of 322k
July: loss of 467k
August: loss of 247k
LD: This number, along with a positive revision of a net 43k jobs to prior months, is another indication of growing stability. Construction lost 76k jobs. Manufacturing lost 52k jobs. Before the economy can do better, it has to stop doing worse. This report plays into that. However, I would ask the question if the economy will merely adapt to overall lessened employment for a protracted period.
Average Hourly Earnings
May : +.1
LD: Another positive sign, although it is muted by the fact that last month’s hourly earnings was surprisingly weak. Over the two month period, an average of .1% per month is to be expected. Will this support a sudden pickup in consumer demand? I doubt it.
Average Hourly Workweek
May: 33.2 hours
June: 33.1 hours
July: 33.0 hours
August: 33.1 hours
LD: Again, this piece of data is consistent with the other parts of this report. For perspective, though, be mindful that last month’s reading was the lowest figure for this data since 1964.
Further Color: While many economists will spin this report as a clear sign of an improving economy, I maintain it is a sign of an adapting economy. I am surprised and disheartened by the fact that so many people have actually left the labor force. That level of discouraged workers, along with the level of long-term unemployed, plays into a real structural problem and long term drag on our economy.
Market Reaction: Equity futures have spiked by approximately .7%, but the biggest market reaction is in the bond market as interest rates have moved higher by approximately 12 basis points across the curve. What is going on there? The market is going to price in an expected increase in rates by the Federal Reserve sooner than Ben Bernanke would otherwise prefer. Recall how Bernanke at his recent Congressional testimony emphatically stated he would leave rates unchanged for an extended period. The market reaction is stating that he may not have that luxury. Why? Fears of inflation.
Additionally, this report will make the underwriting of the massive Treasury supply (3yr, 10yr, 30yr) next week very challenging.
The greenback also had a nice spike after this report. This move is consistent with a market expectation of an increase in rates by the Federal Reserve.
Can the equity market continue to rally in the face of rising rates? I will monitor closely.