Farewell Summer: Lukewarm Jobs Data Contemplated for Possible Rate Impact

Summer is over, the kids are back in school, and the market faces a shortened holiday week still contemplating a somewhat tepid August jobs report. What, if anything, do Friday’s data say about the broader U.S. economy?

The economy created 151,000 jobs in August, down from a revised 275,000 in July, the government reported early Friday. Consensus on Wall Street was for 180,000, and some predictions were higher than that. The actual numbers, accompanied by a steady unemployment rate of 4.9% and wage growth of about 0.1%, were far from horrible, but they certainly don’t paint a picture of an economy that needs to floor the brakes. Due to that, it’s looking far less likely that the Fed would decide to hike rates this month, and instead those expectations are moving down the road toward December, depending, naturally, on what the next few jobs reports say about economic conditions.

As of midday Friday, the closely watched CME Fed futures market predicted a 21% chance of a September rate hike, with the December chance above 50%. As recently as Thursday, chances for a Fed September hike were above 30%, according to futures prices. So there’s little doubt the jobs number caused some investors to trim their sails heading into the weekend. The Fed meeting is approaching fast, on Sept. 20-21.

Not only did the economy not create as many jobs as analysts had expected in August, the jobs weren’t created in what some might call “career building” industries. Instead, much of the job growth was concentrated in food and beverages and social services. There’s nothing wrong with jobs in those sectors, and many of us have worked as waiters and waitresses or tended bar, but these aren’t the sort of positions often associated with the sort of economic muscle that characterizes a really healthy U.S. employment picture.

Despite the doom and gloom, it’s important to keep things in perspective. No, Friday’s job report didn’t show as robust an economic picture as some may have hoped. The economy lost jobs in manufacturing and construction, two areas where it would have been nice to see more growth. But remember, job creation did take place in August, and wages did grow, so things continue to move in the right direction, just a bit more slowly than in June and July, when job creation topped 200,000 a month.

Also, one report doesn’t make a trend, so it’s worth looking at the long-term average for job creation, which stands at a relatively solid 182,000 monthly pace so far this year. That’s below where it was in 2014 and 2015, but the economy only needs to add 145,000 jobs a month to keep up with labor force growth. And the August jobs report has a history of coming in below expectations and then being revised upward later. So maybe this won’t be the last word the market could hear about the August jobs picture.

Typically, when odds of a Fed rate hike ease, yields on U.S. Treasury bonds also fall. But the situation on Friday was different, with yields on the U.S. 10-year Treasury note climbing to above 1.6% by midday after stumbling to 1.57% immediately after weak jobs data. The 10-year yield has been stuck in a range roughly between 1.5% and 1.6% for about a month, so it would probably need to move significantly above current levels to indicate a change in pattern. Rates remain historically low. Financial stocks, however, did climb during the first half of Friday’s session, presumably helped by the rise in bond yields. Other sectors showing strength as of midday Friday included energy, consumer staples, and materials.

Aside from the jobs report, there was some other news to contemplate going into the new week, though from an economic data perspective, the Labor Day week appears to be a rather dull one with no major reports. Lululemon Athletica inc. LULU, the athletic apparel retailer, posted earnings that met consensus expectations, but the stock fell sharply as the company offered an outlook that appeared to disappoint investors.

On Wednesday, the government is scheduled to release its monthly Job Openings and Labor Turnover Survey (JOLTS) report for July. In June, the number of vacancies in the U.S. workforce neared an all-time high and new hires climbed, but many new openings were in low-paying services jobs. It’s worth watching the July data to see if that trend continued. Meanwhile, July factory orders rose 1.9%, the government reported Friday, close to analysts’ estimates.

Is it Christmas in September? Apparently with an eye toward the rather distant future, Wal-Mart Stores, Inc. WMT announced late last week it’s beginning its holiday “layaway” program two weeks early, allowing customers to pay in installments for their holiday gifts. With temperatures in the 70’s in Chicago and beaches still drawing crowds, it may be tough to picture mistletoe at the moment, so WMT’s announcement could either bring happy thoughts of the holidays or a depressing reminder that winter is indeed approaching.

Oil Rebounds Friday But Still Off For Week: Some of the pressure on the stock market last week came in part from another steep drop in crude oil prices, which have been burdened lately by mounting supplies. U.S. stockpiles rose more than 2 million barrels last week, the Energy Information Association (EIA) said, above analysts’ estimates. Total stockpiles remain at record-high levels above 525 million barrels, and gasoline stocks, though falling last week, also remain high. The market got some of its mojo back on Friday after Russian President Vladimir Putin told Bloomberg that it would be the right decision for producers to agree on an output freeze, but talk of a possible freeze has been in the market for several weeks now. Indeed, it was production freeze talk that sent the oil market on its way to a 20% rally in early-to-mid August, but since then, producers have sent mixed messages on production.

Also, it’s worth remembering that the market is entering a slower demand time now that U.S. “driving season” is over, with average gasoline use typically falling between the beginning of September and the start of October, often reducing oil demand. So those who put off their vacations until October may reap benefits at the gas pump.

What do sliding auto sales say about the economy? Auto sales data for August released late last week came in a bit below Wall Street estimates, at an annual pace of 17 million. That’s the slowest pace for an August since 2013, and well below the 17.9 million pace set in July and 17.7 million in August last year. Retail sales of autos have fallen in four of the past six months, after rising for 66 straight months, The Wall Street Journal reported, and more and more, auto companies are relying on fleet sales to rental car companies as well as dealer incentives to prop up sales. But fleet sales aren’t considered as profitable as retail sales. But it’s not necessarily so dire a picture, especially in light of last year’s record sales and all those consecutive months of rising sales prior to early 2016. To put things in perspective, 17 million sales on an adjusted basis is still quite high, considering sales were below 15 million every year between 2008 and 2012.

Is Middle Class Economy Reviving? Recently, the New York Fed released a report showing that between 2013 and 2015, more than 2.3 million “middle class” jobs were created in sectors like education, construction, and transportation. These jobs typically paid in the $30,000 to $60,000 range, and creation of such jobs out-numbered creation of higher and lower wage jobs during that time period. Many economy watchers have decried the seeming decline of the U.S. middle class, but this report would seem to indicate a possible revival. “For the first time in quite a while, gains in middle-wage jobs actually outnumber gains in higher- and lower-wage jobs nationwide,” said New York Fed President William Dudley, in remarks published last month. “These middle-wage jobs include teachers, construction workers, mechanics, administrative support personnel and truck drivers, just to name a few. I believe this is an important development in the economy, because, if it were to continue, it would create more opportunities for workers and their families who have been struggling up to now.”

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