A Huge Miss On Payrolls – Now What?

Earlier this week I proposed a drinking game for bored, pre-holiday weekend traders that required imbibing when the phrase “Friday’s key non-farm payrolls report” or similar was mentioned. A dopey game to be sure, but it is now time for sober investors to consider the ramifications of a significant shortfall in the headline number.

I’m quite sure that many were as surprised as I was when the Bureau of Labor Statistics (BLS) released their August payroll report this morning at 8:30 EDT. Economists surveyed had a median estimate of a 733,000 increase in non-farm payrolls. Instead we got 235,000 – only about 1/3 what was expected. While there was a positive revision of 110,000 to the July report, that still put us nearly 500,000 jobs short of expectations. That sort of miss is eye-catching, head-scratching, and potentially detaching us from the economic narrative that has persisted for months.

But the full set of statistics was not nearly as gloomy as the headline indicated. The unemployment rate fell 0.2% to 5.2%, which met expectations.  Remember that unemployment statistics measure those who are looking for work but not finding it and excludes those who left the workforce.  Average hourly earnings rose 4.3% on a year-over-year basis vs. a 3.9% expectation, up 0.2% from last month after an upward revision to last month’s figure. The underemployment rate fell to 8.8% from 9.2% and the labor force participation rate was unchanged at 61.7%. 

The labor picture may in fact be much healthier than the payrolls number indicates. We can create a scenario where people have reoriented their priorities to work less or demand more from employers. Wealth effects from buoyant asset markets are likely playing a role here. Under those circumstances, employers would be reluctant to add new jobs at higher prevailing wage rates, suppressing payrolls growth but supporting wage growth. We don’t know precisely the Federal Reserve’s metrics for gauging full employment, though it is likely to occur at a point when continued reductions in the unemployment rate require wage boosts.(Higher wages are considered a harbinger of non-transitory inflation, even though they benefit workers). Although the current unemployment rate is above the lows seen before the Covid crisis, it is a historically low level and we can argue that any reductions in unemployment might indeed require higher wages.

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