After a better than expected ADP report and decent employment numbers in both the manufacturing and non-manufacturing ISMs, today’s U.S. Bureau of Labor Statistics employment report was expected to be a decent report. Investors were underwhelmed as the headline unemployment rate actually increased.
Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today.
The unemployment rate is “essentially” unchanged from May, rising 0.1% but the unemployment rate has increased by 0.4% since March. The headline number is a great political tool but it is not the best tool for formulating an investment thesis.
What we’re most concerned with is underemployment and its rate of change. The average workweek and overtime hours are good gauges of future changes in unemployment. Businesses tend to increase or decrease the workweek before hiring or firing workers.
The average workweek for all employees on private nonfarm payrolls decreased by 0.1 hour to 34.3 hours in June. The manufacturing workweek for all employees decreased by 0.3 hour to 40.3 hours over the month; factory overtime edged down by 0.1 hour to 3.1 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls remained at 33.6 hours in June.
The reductions in the workweek and overtime were not that drastic but they are moving in the wrong direction. Unemployment is too high for this stage in a recovery and a declining workweek doesn’t give us confidence that unemployment will improve anytime soon.
Another measure of underemployment, the U-6, increased to 16.2%. The U-6 includes part time workers and marginally attached workers. The U-6 is at its highest level for the year.
Lastly, the labor force participation rate remains at 64.1%. Well below its 20 year average of 66-67%.
Chart courtesy of Calculated Risk.
The employment report provides us with additional economic data pointing to a softening economy but not a recession. At the start of this summer we took a defensive short-term tactical position in our asset allocation accounts by bringing equity positions, U.S. and international, below target weights. We continue to maintain a below target equity allocation.
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