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Is the Market Reading It Correctly?

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Friday, September 6, 2013

The market’s initial favorable reaction to the mildly disappointing jobs report may not have much staying power. The reason is that this report isn’t materially outside of the recent trend line to prompt the Fed to change its thinking on the Taper question, meaning this month’s FOMC meeting will likely bring the Taper announcement.

August non-farm payrolls came in at +169K vs. expectations of about +175K and negative revisions to July and June. The revision was particularly severe for July, with that month’s headline gain reduced to 104K from the originally reported 162K level; the combined revisions for July and June was a net negative -74K.

Private sector jobs totaled 152K in August, meaning that the government sector added jobs during the month. Negative revisions to government jobs was a big driver for the sharp revision to the prior month’s tally. The average workweek inched up 0.1 hours to 34.5 hours, while average hourly earnings rose by 5 cents to $24.05, up +2.2% year over year.

The unemployment rate dropped to 7.3% from 7.4%. The drop in the unemployment rate was largely a function of lower labor force participation rate, the share of the U.S. population that is either working or looking for work. The labor force participation rate dropped to 63.2% in August, the lowest level since the late 1970’s (the rate was 63.4% in July).

A charitable view of this report can be that it isn’t way off the past year’s trend line. The headline gain of 169K in August compares to the preceding 12-month’s average of 184K. Consensus expectations hadn’t budged much following Thursday’s inline ADP reading, but many had been looking for a much stronger number given the momentum in the two ISM surveys and the very low level of Jobless Claims.

Those data points appeared to show that improved economic growth could more than make up for the rising interest rates as a result of changes to the Fed’s QE program. The Fed is likely fine with this environment and will move towards ‘Taper’ later this month, but the stock market may not get the economic and earnings growth that it has been pricing in.

Sheraz Mian

Director of Research

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