Friday, July 06, 2018

The Economy Is More Than Just Jobs But...

Today's employment report was strong as nonfarm payrolls increased 213,000 and beat expectations of 190,000. The prior month's report of 223,000 jobs was revised higher to 244,000. In short, a strong jobs report. A positive in the report was the increase in the participation rate to 62.9% versus the prior month's participation rate of 62.7%. The number of unemployed actively looking for jobs jumped 499,000 to 6.564 million. Because the change in payrolls was smaller than the change in the number actively looking for a job, the unemployment rate increased to 4.0% from the prior month's rate of 3.8%.

The increase in the unemployment rate to 4.0% moves the rate close to the 12-month moving average of the same rate, i.e., 4.1%. It is not uncommon for the sidelined unemployed to be pulled back into looking for a job when the labor market gets tight and the economy nears the end of its economic cycle. I am not saying the end of the expansion is around the corner; however, companies tend to operate at a high level late in the economic cycle with employment demand high. Additionally, if the unemployment trend moves the rate above its 12-month moving average on a sustained basis, this could have negative economic implications, i.e., job seekers finding it difficult to secure a job.

The last chart below shows the U-1 unemployment rate (h/t: Dash of Insight) that represents individuals that have been unemployed for 15 weeks or longer. Two observations from the current rate of 1.4%. One, there remains long term unemployed individuals that can be pulled off the sidelines into the labor force, maybe down to near the 1% level. And secondly, this narrow measure tends to tick higher at the end of an economic expansion as individuals find that it is more difficult to find employment and thus unemployed for a longer period of time. The recent June reading of 1.4% is 0.1% higher than May's 1.3% reading.

In conclusion, the job market is tight and a few yellow flags seem to be waving. On the other hand, much of the other economic and business news is favorable. In a recent post at The Fat Pitch website, July Macro Update: The Economy Is Fine. Trade War Rhetoric Is The Main Risk, the post reviews many positives. The one risk he notes in his title is that surrounding the Trade War Rhetoric. At HORAN we believe there is more room to the upside, but investors need to be vigilant on a change in economic direction.

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