August Employment Report Preview

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Sep 1, 2016 3:05:31 PM

and tagged In the News

Leave a comment

employment reportOf all the economic reports out there—and there are thousands—the one I follow most closely is the employment report.

Why? Jobs are the best single indicator of what the economy is doing. Consumers get their income from their jobs, so the employment report shows where that sector of the economy may be headed. For business, hiring requires both expanding demand and confidence that expansion will continue, so jobs also serve as a guide for that sector.

Digging a little deeper, jobs drive changes in consumer confidence and willingness to spend and borrow, which in turn can drive the housing market, the money markets, and much of the rest of the economy. Jobs really are the keystone of economic data, and this is why the monthly jobs report is analyzed so heavily.

Expectations for strong growth

The August jobs report is an unusually significant one. With the Federal Reserve potentially poised to raise rates, a strong jobs number could justify a September increase. With signs of weakness largely past, a positive report could ratify the renewed recovery and drive consumer confidence even higher. After two very strong months, expectations are for slower but still strong jobs growth, of around 180,000–190,000.

So far, this looks quite reasonable. The report by ADP, a major payroll processing firm, showed that 177,000 jobs were added last month, in line with expectations and very consistent with what the jobs report is expected to show. Initial jobless claims are still running at a rate of around 260,000–270,000, consistent with strong jobs growth. Business surveys still show companies hiring strongly.

Expectations for strong results seem well grounded. If job growth is in line with expectations, that would be good news.

But what if we get a surprise?

Upside. The argument for an upside surprise is largely based on the past two months, when job growth came in over 250,000 even though the ADP report was in the 170s, as it is right now. If the ADP report missed the jobs then, why not this month as well?

Looking at the details, though, it would be hard to repeat. Business and professional services, for example, added a massive 70,000 jobs last month, which is unlikely to happen two months running, and manufacturing looks to have lost jobs rather than added them. Nevertheless, such a surprise remains possible, in which case the Fed would face more pressure for a September rate increase.

Downside. A somewhat more possible surprise is to the downside. With growth revised down and productivity suffering, companies may focus more on efficiency and investment rather than hiring. Although this will probably show up at some point, there are few signs it is happening now.

A bigger risk is seasonality. One analyst noted that since the financial crisis, the August jobs report has disappointed five of seven times. I don’t really like arguing from history, but this does suggest some form of seasonal misestimate that raises the chances of an apparent substantial decline in job growth. If so, expect talk of a rate hike to be dialed back, as we have seen before.

So what should we expect?

Overall, job growth will most likely come in around the expected level, which would be both healthy and sustainable. This would also be the best outcome for the economy as a whole and for financial markets. Of the two possible surprises, the shortfall is perhaps more likely, but it would largely be due to technical and seasonal factors rather than to a substantial slowdown, limiting the real economic impact. In fact, by reducing the chances of a near-term rate increase, the effect could end up being positive for financial markets.

Conversely, a stronger-than-expected report (of, say, over 220,000 or so) would be positive for economic growth, but by raising pressure for a rate hike, it might end up being negative for markets. In this case, however, the damage from higher rates would be offset by the stronger economic growth such a high level of job growth would create.

The bottom line is that unless we get a seriously weak report, which is not expected, the economic consequences will be largely positive, while the impact on the financial markets will be mixed to positive. The economy as a whole remains in growth mode, with employment in particular doing very well, and tomorrow's report should continue to reflect that.

  Subscribe to the Independent Market Observer -

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®