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September 5, 2014 AUGUST JOBS REPORT DISAPPOINTS, BUT DOES NOT INDICATE A SLOWING IN LABOR MARKET RECOVERY SUMMARY The U.S. economy added 142,000 jobs in August, well below expectations. This was the first time in seven months job growth has fallen below 200,000. There were net downward revisions to job growth in the previous two months. The unemployment rate fell to 6.1 percent in August, primarily because of a contraction in the labor force. Although job growth was weak, labor income growth in August was better than in July. Some one-time factors slowed job growth in August. In addition, job growth for the month is likely to be revised higher. The fundamentals of the U.S. economy remain strong, with above-trend growth expected in the second half of this year. Job growth will continue to run at an average monthly pace of 200,000 through the rest of this year. The unemployment rate will continue its gradual decline. The disappointing jobs report does not change the outlook for monetary policy. August payroll jobs growth was disappointing, with only 142,000 jobs added over the month. This was the first time since January that job gains were below 200,000. The increase in jobs was far below the consensus expectation of 220,000 and PNC's forecast for 230,000. August private-sector employment was up by only 134,000, well below the ADP figure of 204,000, while government jobs were up by 8,000, with state and local government jobs up by 5,000 and Federal government jobs up by 3,000. Job growth was 212,000 in July (revised up from 209,000), and 267,000 in June (revised down from 298,000), for a total downward revision of 28,000. Although the August number was a disappointment, job growth over the past three months has still averaged 207,000, a pickup from earlier in the year when the frigid weather weighed on hiring (see Chart 1). In August total payroll jobs rose to 139.12 million; this further surpassed the previous payroll job peak of 138.37 million in January 2008, which was followed by a massive loss of 8.7 million jobs during the Great Recession before employment bottomed out in early 2010. Even with the new August high in payroll jobs there is still a great deal of slack in the labor market as the U.S. working-age population has steadily increased. The unemployment rate fell to 6.1 percent in August, from 6.2 percent in July. However, the August unemployment rate was 6.1497 percent to four decimal places, and so just barely rounded down to 6.1 percent. And the change in the unemployment rate was for the “wrong” reason. The number of people who reported having jobs in the household survey (different from the survey of employers) was up by just 16,000, while the labor force contracted by 64,000. As a result, the number of unemployed fell by 80,000 over the month. The labor force participation rate fell to 62.8 percent in August, from 62.9 percent in July, returning to its cyclical low (see Chart 2). The labor force participation rate has been hovering near 63 percent for a year; previously it had not been that low since the late 1970s. The U6 unemployment rate (unemployed, “under employed” and too discouraged to even look for a job) fell to 12.0 percent in August, down from 12.2 percent in July; this is the lowest U6 rate since late 2008. One positive from the household survey is that the number of people working part-time for economic reasons continued to decline, falling by 234,000 in August. September 5, 2014 AUGUST JOBS REPORT DISAPPOINTS, BUT DOES NOT INDICATE A SLOWING IN LABOR MARKET RECOVERY August payroll job gains were mixed across industries. Construction jobs rose by 20,000, the eighth straight monthly increase for a total of 192,000. Manufacturing jobs were flat, ending a streak of twelve straight monthly increases. The average workweek in manufacturing fell slightly to 40.9 hours, from 41.1 hours in July. Private service-producing industries added 112,000 jobs in August. This included gains of 47,000 in professional/business services (including 13,000 temp jobs), 15,000 in leisure/hospitality services, 7,000 in financial activities, and 37,000 in eds and meds. Trade/transportation employment rose by just 1,000 in August; this was held down by a strike at a supermarket chain in New England, as retail trade jobs fell by 8,000 over the month. And information services jobs fell by 3,000 in August. workweek, aggregate hours rose 0.1 percent; combined with a higher average wage, workers’ earned income rose by a solid 0.4 percent in June. Prices were likely flat in August given the recent drop in gasoline prices (the August CPI will be reported on September 17), so incomes grew ahead of inflation over the month, supporting moderate growth in consumer spending. Vehicle sales jumped in August to a very strong 17.5 million annual rate, well above the 16.2 million pace in the first half of the year, another indication that incomes are rising and consumers are spending more. Solid job and wage gains so far in 2014 are supporting our forecast for real GDP growth in the second half of 2014 of about 3 percent at an annual rate, above the long-term trend. One positive in the jobs report is that average hourly wages rose by 0.2 percent for the month, after they barely increased in July. The average workweek held steady at 34.5 hours. With more workers and an unchanged average In summary, the 142,000 rise in August payroll jobs, while disappointing, does not indicate weakness in the economy. The weaker job growth in August is inconsistent with a long list of other measures—initial unemployment insurance claims, the ISM surveys, auto sales, construction spending, 600 500 400 300 Chart 1: Both Employer, Household Surveys Show Monthly Job Growth of Around 200,000 Monthly change in employment, 3-month moving average, ths Establishment survey 200 100 0 -100 Household survey -200 -300 '11 Chart source: Bureau of Labor Statistics '12 '13 '14 2 September 5, 2014 AUGUST JOBS REPORT DISAPPOINTS, BUT DOES NOT INDICATE A SLOWING IN LABOR MARKET RECOVERY and many others—that show above-trend growth in the middle of 2014. The weak August numbers are likely to be revised higher—in recent years there have been large upward revisions to August employment levels—and job growth is set to bounce back in September. It could be that the seasonal adjustment factors for August understated job growth for the month, perhaps due to the early Labor Day weekend, perhaps due to shorter-than-usual shutdowns for auto plant retooling. The FOMC will correctly regard this report as an anomaly, and further reduce their purchases of long-term assets to $15 billion per month when they meet in two weeks, and then wrap them up completely in late October. Given that average hourly earnings continue to increase at a modest 2 percent year-over-year pace, we still do not expect the first increase in the Fed funds rate until the second half of 2015. 11.0 Underlying job growth is running at a little more than 200,000 per month. The numbers have been choppy in 2014 because the bad winter early in the year and then a bounce back in job growth as the economy thawed, but the pace of job creation has been stronger than in 2013. Given above-trend growth job gains will maintain their current pace of around 200,000 per month through the rest of this year and into next. The unemployment rate will continue its gradual decline, ending this year a little below 6 percent, and ending next year at around 5.5 percent. Stock prices were up slightly by mid-afternoon despite the weaker-than-expected jobs report, with commodity prices lower. The dollar is down slightly today, after it rose yesterday on the unexpected news of the ECB rate cut. The 10-year Treasury note rate is lower by 2 basis points to around 2.42 percent, still up from its recent lows of around 2.35 percent in late August/early September. Chart 2: Unemployment Rate Is Falling, But No Improvement in Labor Force Participation Rate 66.0 65.5 10.0 65.0 Unemployment rate, % (L) 9.0 64.5 64.0 8.0 63.5 Labor force participation rate, % (R) 7.0 63.0 6.0 62.5 '09 '10 '11 '12 '13 '14 Chart source: Bureau of Labor Statistics Visit http://www.pnc.com/economicreports to view the full listing of economic reports published by PNC’s economists. Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. 3