Employment Report Wage Gains Lead to Treasury Losses

Sep 07, 2018

The August Employment Report beat on the headline jobs growth number (201,000 vs. 190,000 expected) but prior two-month revisions cut 50,000 jobs thereby more than offsetting the 11,000 beat in today’s report.  Meanwhile, what has become the key metric in the report, average hourly earnings,  easily beat expectations with a 2.9% YoY rate that was 2/10ths better than expected and a nine-year high. While this rate remains shy of the 3.0%-3.5% pre-crisis levels the 0.4% monthly gain (highest since December) and the pop in the year-over-year number will keep the Fed on track for a rate hike in September and almost assuredly in December as well. In fact, given the ongoing labor market gains and economic strength, the limiting factor to future rate hikes beyond December may be more the impact of trade actions, emerging market concerns and foreign economic trends. The wage numbers have Treasuries under pressure with the 2-year note off 3/32nds to yield 2.69% and the 10-year note off 15/32nds to yield 2.93%. If the report keeps the Fed firmly on a quarterly hiking schedule, and we think it does, we view the back-up in longer-term yields as a buying opportunity given the Fed’s history of hiking until we get a recession.


  Economic News


For the month, 201,000 jobs were created beating the 190,000 expected but well above the 147,000 jobs created in July (downwardly revised from 157,000).  Over the past year monthly job gains have averaged 199,000, so August’s results were above that average as well. Private payrolls increased 204,000 versus 194,000 expected and 153,000 in July (revised down from 170,000).  Two-month revisions subtracted  50,000 jobs from prior prints, more than offsetting the 11,000 beat this month. Digging into the categories, 178,000 service-providing jobs were added during the month (89% of total job growth) versus 117,000 in July. Gains were led by professional and business services (+53k) and health-care and social assistance (+40k).  Meanwhile, 26,000 goods-producing jobs were added (11% of the total), which is down from the 36,000 added in July with construction (+23k) leading the gains in that sector. 


Perhaps the most important metric in the monthly jobs report are the wage gain numbers. For August, wages improved with both the monthly and year-over-year prints beating pre-release expectations. Average hourly earnings for August rose 0.4% beating the 0.2% expectation and ahead of the 0.3% gain in July. In fact, the August gain was the largest since December’s 0.4% print.  Year-over-year earnings were 2.9% which easily beat the 2.7% expectation and the highest since May 2009.   While the YoY gain  remains just shy of the 3.0% to 3.5% pre-recession rate, the 2/10ths move to a nine-year high will likely embolden the Fed that we are approaching full employment with quarterly rate hikes the end result.


The unemployment rate remained at 3.9% (3.853% to be exact), missing the expected downtick to 3.8%.  The  rate remained unchanged as the labor force denominator fell after it managed to grow strongly for three straight months. The labor force decreased 469,000  which overwhelmed the small 46,000 drop in the ranks of the unemployed. As mentioned, the labor force increased from May through July with the June gain a huge 601,000. Thus, we were expecting some give-back and it eventually happened in August. Thus, the unchanged unemployment rate will be viewed more as a statistical anomaly and nothing fundamentally-based.


The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) did tick down another 1/10th to 7.4% setting a new cycle low.  The rate drop was due to a decrease of –46,000 in the ranks of the unemployed,  -188,000 in part-time workers, and a decrease of 55,000 in the ranks of the marginally attached (those willing to work but not actively looking). Offsetting those positives was the aforementioned -469,000 drop in the labor force denominator. This rate bottomed in the 7.9% - 8.2% range prior to the recession, thus we are somewhat into uncharted territory with the present underemployment rate and is another indication we are most likely operating at full employment.


The labor force participation rate (labor force divided by civilian population) fell 2/10ths to 62.7%  as the -469,000 drop in the labor force combined with a 223,000 civilian population gain led to the lower participation rate.  The dip follows three straight months  at 62.9% and the current reading pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.0% participation rate range of late may well be the new full employment normal given the aging of the working population and slowing population gains.


In summary, this is another solid jobs report with the 0.4% MoM and 2.9% YoY wage gains the lead story. The wage numbers alone will keep the Fed firmly in hiking mode, In fact, the limiting factor to future rate hikes may be more the impact of trade actions, emerging market concerns, and foreign economic growth and condition trends. For now, however, this report, and most other releases of late, will keep the Fed on its quarterly hiking schedule for the foreseeable future.




Market Update  Year-over-Year Change in Avg. Hourly Earnings


Average hourly earnings has become the most important metric in the monthly employment reports. With the unemployment rate hovering near cycle lows, and well below the Fed’s long-run equilibrium rate of 4.5%, wage gains rose 0.4% in August beating the 0.3% expectation and the highest since December’s 0.4% print. The graph illustrates YoY earnings for workers dating back to the mid-60’s (recessions in red bars). While current wage gains are shy of prior periods— with the average over the 53-year period at 4.2%—the August move to a nine-year high will likely embolden the Fed to remain on its quarterly hiking schedule for the foreseeable future.


Year-over-Year Change in Avg. Hourly Earnings



Agency Indications  Market Rates


Market Rates



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