The headline seasonally adjusted BLS job growth was below expectations. The internals generally look good, and the pace of year-to-date growth exceeds last year.

Analyst Opinion of the BLS Employment Situation

The household and establishment surveys were not in sync. The year-to-date employment is running above the pace of last year. There were significant employment declines such as sporting goods stores.

• The year-over-year rate of growth for employment insignificantly decelerated this month (blue bars on graph below). This is a year-over-year analysis which has no seasonality issues.

• Economic intuitive sectors of employment were positive.
• This month's report internals (comparing household to establishment data sets) was inconsistent with the household survey showing seasonally adjusted employment expanding 389,000 vs the headline establishment number expanding 170,000. The point here is that part of the headlines are from the household survey (such as the unemployment rate) and part is from the establishment survey (job growth). From a survey control point of view - the common element is jobs growth - and if they do not match, your confidence in either survey is diminished. [note that the household survey includes ALL jobs growth, not just non-farm).
• The household survey added 105,000 people to the labor force.
• The National Federation of Independent Business (NFIB)'s monthly Jobs Report is at the end of this post.

A summary of the employment situation:

• BLS reported: 157K (non-farm) and 170K (non-farm private). Unemployment rate declined from 4.0 % to 3.9 %.
• ADP reported: 219K (non-farm private)
• In Econintersect's July 2018 economic forecast released in late June, we estimated non-farm private payroll growth at 200,000 (based on economic potential) and 230,000 (fudged based on current overrun/under-run of economic potential).
• The market expected (from Nasdaq / Econoday):

Seasonally Adjusted Data	Consensus Range	Consensus	Actual
Nonfarm Payrolls - M/M change	150,000 to 205,000	188,000	157,000
Unemployment Rate - Level	3.8 % to 4.0 %	3.9 %	3.9 %
Private Payrolls - M/M change	148,000 to 204,000	184,000	170,000
Manufacturing Payrolls - M/M change	11,000 to 22,000	15,000	37,000
Participation Rate - level	62.7 % to 62.8 %	62.8 %	62.9 %
Average Hourly Earnings - M/M change	0.2 % to 0.4 %	0.3 %	+0.3 %
Average Hourly Earnings - Y/Y change	2.6 % to 2.8 %	2.7 %	+2.7 %
Av Workweek - All Employees	34.4 hrs to 34.5 hrs	34.5 hrs	34.5 hrs

The BLS reports seasonally adjusted data - manipulated with multiple seasonal adjustment factors, and Econintersect believes the unadjusted data gives a clearer picture of the jobs situation.

Non-seasonally adjusted non-farm payrolls expanded 80,000 - less than last year. The following chart compares the jobs gains this month with the same month historically:

Year-to-date unadjusted employment growth is 164,000 people above the pace of last year.

 

Last month's headline employment gains were revised up. Generally speaking, the INITIAL employment gain estimate is overstated when the economy is slowing and understated when the economy is accelerating.

Most of the analysis below uses unadjusted data, and presents an alternative view to the headline data.

Unemployment

The BLS reported U-3 (headline) unemployment was 3,9 % with the U-6 "all in" unemployment rate (including those working part-time who want a full-time job) changed from 7.8 % to 7.5 %. These numbers are volatile as they are created from the household survey.

BLS U-3 Headline Unemployment (red line, left axis), U-6 All In Unemployment (blue line, left axis), and Median Duration of Unemployment (green line, right axis)

Econintersect has an interpretation of employment supply slack using the BLS employment-population ratio, demonstrated by the graph below. The employment-population ratio moved from 60.4 to 60.5.

Employment-Population Ratio

The jobs picture - when the employment / population as a whole - has been on an uptrend since mid-2011. This ratio is determined by household survey.

• Econintersect uses employment-population ratios to monitor the jobless situation. The headline unemployment number requires the BLS to guess at the size of the workforce, then guess again who is employed or not employed. In employment-population ratios, the population is a given and the guess is who is employed.
• This ratio has been in a general uptrend since the beginning of 2014. The employment-population ratio tells you the percent of the population with a job. Each 0.1 % increment represents approximately 300,000 jobs. [Note: these are seasonally adjusted numbers - and we are relying on the BLS to get this seasonal adjustment factor correct]. An unchanged ratio would be telling you that jobs growth was around 150,000 - as this is approximately the new entries to the labor market caused by population growth.
• The growth in employment since the Great Recession has been in full-time jobs.

 

Employment Metrics

The growth trend in the establishment survey's non-farm payroll year-over-year growth rate was trending up beginning of 2014 but has been trending down beginning in 2015. Year-over-year growth rate insignificantly improved this month.

Unadjusted Non-Farm Payrolls Year-over-Year Growth

Another way to view employment is to watch the total hours worked which no clear trend is obvious.

Percent Change Year-over-Year Non-Farm Private Weekly Hours Worked

The bullets below use seasonally adjusted data from the establishment survey except where indicated:

• Average hours worked (table B-2) was unchanged at 34.5. A rising number normally indicates an expanding economy.
• Government employment declined 13,000 (-13K) with the Federal Government up 2K, state governments up 5K and local governments down 20K.
• The big contributors to employment growth this month was manufacturing (37K), food services (26.2K), and temp help (27.9K). There was a big decline in sporting goods stores (31.8K).
• Manufacturing was up 37K, and construction was up 19K.
• The unemployment rate (from household survey) for people between 20 and 24 (Table A-10) improved 0.5 to 6.9 %. This number is produced by survey and is very volatile.
• Average hourly earnings (Table B-3) was up $0.07 to $27.05.

Private Employment: Average Hourly Earnings

Economic Metrics

Economic markers used to benchmark economic growth (all from the establishment survey).

The truck employment was up 4.4K.

Truck Transport Employment - Year-over-Year Change

Temporary help was up 27.9K.

Temporary Help Employment - Year-over-Year Change

Econintersect believes the transport sector is a forward indicator. Others look at temporary help as a forward indicator.

Food for Thought

Who are the victims in this employment situation. It is not people over 55.

Index of Employment Levels - 55 and up (blue line), 45 to 54 (red line), 35 to 44 (green line), 25 to 34 (purple line), 20 to 24 (light blue line), and 16 to 19 (orange line)

Women are doing better than men.

Index of Employment Levels - Men (blue line) vs Women (red line)

Mom and Pop employment remains below recessionary levels.

The less education one has, the less chance of finding a job.

Index of Employment Levels - University graduate (blue line), Some college or AA degree (orange line), high school graduates (green line), and high school dropouts (red line)

Here is an indexed view of employment levels.

Index of Employment Levels (from the BLS Establishment Survey) - Hispanic (blue line), African American (red line), and White (green line)

However, keep in mind that population growth is different for each group. Here is a look at employment to population ratios which clearly shows NO group has recovered from the Great Recession:

Employment / Population Ratios (from the BLS Household Survey) - Hispanic (blue line), African American (red line), and White (green line)

National Federation of Independent Business (NFIB)'s monthly Jobs Report Statement:

The tight labor market continues to be the biggest problem facing small businesses, with 37 percent of owners reporting job openings they could not fill in the current period, a new survey high. Up one point from June, 13 percent of owners reported using temporary workers to compete in the tight labor market according to NFIB's monthly jobs report, released today.

"The July jobs report shows the magnitude of small businesses that are growing and hiring at record levels, creating new jobs and opportunities for the workforce, and offering employees higher compensation," said NFIB President and CEO Juanita D. Duggan.

Job openings are most frequent in construction (57 percent), manufacturing (46 percent), and wholesale trades (45 percent). Small business owners reported job openings for both skilled and unskilled labor. Thirty-three percent reported openings for skilled workers and 15 percent reported openings for unskilled labor, both two points higher than June's report.

The number of small businesses planning to create jobs across the country remains at record high levels in July, while owners added the largest number of workers in 12 years. A seasonally-adjusted net 23 percent are planning to create new jobs, up two points from June's 21 percent. Owners added the largest number of workers per firm since 2006, adding a net 0.37 workers per firm on average.

"Small business owners are continuing to show that they're looking to hire and willing to pay more to hire the right employees," said NFIB Chief Economist Bill Dunkelberg. "Record job openings suggest that the economy can keep up its growth pace over the next few years if the labor shortage can be resolved or mitigated."

Small businesses report a net 32 percent of higher worker compensation, up one point from last month. Plans to raise compensation rose one point to a net 22 percent, two points below the peak of 24 percent in January of this year.

Caveat on the use of BLS Jobs Data

The monthly headline data ends up being significantly revised for months after the initial release - and is subject also to annual revisions. The question remains how seriously can you take the data when first released.

Econintersect Contributor Jeff Miller has the following description of BLS methodology:

1. An initial report of a survey of establishments. Even if the survey sample was perfect (and we all know that it is not) and the response rate was 100% (which it is not) the sampling error alone for a 90% confidence interval is +/- 100K jobs.
2. The report is revised to reflect additional responses over the next two months.
3. There is an adjustment to account for job creation — much maligned and misunderstood by nearly everyone.
4. The final data are benchmarked against the state employment data every year. This usually shows that the overall process was very good, but it led to major downward adjustments at the time of the recession. More recently, the BLS estimates have been too low.

ADP (blue line) versus BLS (red line) - Monthly Jobs Growth Comparison

However, there is some discussion that neither the ADP nor BLS numbers are correct - as both are derived by a sampling methodology. The answer could be that there is no correct answer in real time - and that it is best to look at the trends. As has been noted, all eventually end up correlating.

The BLS uses seasonal adjusted data for its headline numbers. The seasonally adjusted employment data is produced by an algorithm. The following graph which shows unadjusted job growth - seasonal adjustments spread employment growth over the entire year. Employment does not really grow in the second half of the year and always falls significantly in January.

Non-Seasonally Adjusted Employment - Private Sector

There is the proverbial question on what is minimal jobs growth each month required to allow for new entrants to the market. Depending on mindset, this answer varies. According to Investopedia, the number is between 100,000 and 150,000. The Wall Street Journal is citing 125K. Mark Zandi said 150K. Econintersect is going with Mark Zandi's number:

• In Econintersect's June 2014 economic forecast released in late May, we estimated non-farm payroll growth at 160,000 (unadjusted based on economic potential) and 229,000 (fudged based on current overrun of economic potential).
• If Econintersect uses employment-population ratios, the correct number would be the number where this ratio improved. Using the graph below, the ratio began to improve starting a little after mid-year. This corresponds to the period where the 12 month rolling average of job gains hit 150,000.

Employment to Population Ratio

Note: The ratio could be fine-tuned by adjusting to the ratio of employment to working-age population rather than the total population. However, this would not change the big picture that an increase of somewhere around 150,000 (+/-) is needed for the growing population numbers. We have estimated 140k - 160k. The number might possibly be within the range 125k - 175k. Econintersect cannot find reason to support the estimates below 125k.

The question of how changing demographics impact the employment numbers is at the margins of analysis. Econintersect will publish more on this fine-tuning going forward, both in-house research and the work of others.