Employment, hot sweat to come!

On the U.S. economy at the Jackson Hole Central bank Conference the day before yesterday, Fed Chairman Jerome Powell said:

“While the latest economic data have been mixed, our economy, in my view, continues to show strong underlying momentum. The Labor market in particular is strong, but it is clearly unbalanced, with demand for workers vastly outstripping the supply of available workers.”

What does “mixed” economic data mean?

Important overall economic data in the United States can be roughly divided into 10 categories:

Interest rate (including benchmark interest rate, Treasury bond yield, repo rate, etc.);

Employment (non-farm, jobless claims, payrolls, unemployment rate, employment rate, wages, etc.);

Economic growth (GDP, GNP, economic growth rate, etc.);

Federal finance (expenditure, revenue, deficit, federal debt, etc.);

International trade (imports of goods and services, exports, trade deficits, etc.);

Current, capital and financial accounts;

Price index (CPI, PPI, house price index, employment cost index, inflation rate, inflation expectations, etc.);

Personal income and expenditure (personal income, disposable income, consumer spending, consumer borrowing);

Production and sales data (purchasing managers index, business confidence index, industrial production index, business inventories, factory new orders, equipment starts, durable goods orders, housing starts and building permits, new home sales, etc.);

Consumption data (retail sales, consumer confidence, etc.).

Among the 10 broad categories of data I have identified, interest rates, federal finance, international trade, current account, etc. are neither good nor bad for the U.S. economy, as long as they do not show extreme abnormal changes.

Based on the past few months, the data on employment, income and expenditure, production and sales, and consumption in the US have all been so good that the word “hot” can be used to describe it.

By contrast, economic growth, price index (inflation) data, is very bad.

Put it all together, and Powell says it’s a mixed bag.

In addition to the interest rates that the Fed watches and controls, at the annual Jackson Hole central bankers’ conference, Powell added additional references to growth, inflation, inflation expectations, and employment, and I’ve written three posts detailing the complexity of the first three:

-1.4% means stagflation? You don’t understand US economic data!

Inflation, has it peaked?

Doubt it, inflation has peaked!

Today, by talking about what’s really going on in the U.S. economy, we’re going to take a closer look at a bunch of jobs and unemployment data.

Many people who know about overseas investment should know that in the U.S. capital market, the first Friday of every month, the market is usually a time of high price volatility. Why?

It was the day of the release of the U.S. non-farm data.

Because the non-farm data is directly related to the Fed’s monetary policy choices

This time, Powell says the U.S. labor market is strong, the demand for workers far exceeds the supply of available workers, and this is out of balance.

Right now, workers’ wages are rising too fast, and I want to accelerate interest rate hikes to suppress them!

On the first Friday of every month, the Bureau of Labor Statistics releases its monthly Employment Situation Report, which includes three numbers: nonfarm payrolls, the employment rate, and the unemployment rate. In addition, the data also includes the number of US manufacturing jobs, US wages growth and so on.

The Employment Situation Report itself comes from the Labor Department’s household survey, which provides estimates of the labor force and unemployment rate based on individual interviews with 60,000 households, and the Agency Survey. The latter collects data from about 142,000 nonfarm business and 689,000 government jobs, covering a very broad sample of about one-third of nonfarm employment in the United States.

Here’s an explanation.

Although the United States is the world’s largest food exporter and the world’s largest crop exporter, it is ironic that agriculture plays a low role in the American economy. Take 2020 as an example, the GDP of the United States is about 21 trillion US dollars, of which the total GDP of agriculture (including agriculture, forestry, animal husbandry and fishery) is only 175.8 billion US dollars, even less than 1% of the GDP.

At the same time, the total number of agricultural workers in the United States is just over 5 million, less than 3 percent of the working-age population in the United States. In addition, agricultural employment statistics are also very difficult to determine (unemployment, part-time jobs, etc., are not applicable to agriculture), so in terms of employment and unemployment, the United States often emphasizes “non-agricultural”.

The non-farm data is not only a proxy for the overall employment situation in the United States, but also, by extension, a proxy for how the average American feels about the “American economy.” As for the Federal Reserve, it is extremely important that monetary policy is directly tied to the employment situation.

The most important jobs data in the US are the monthly non-farm payrolls and monthly gains;

The most important unemployment data in the United States are the number of unemployed people and the unemployment rate;

There are two other jobs numbers in the United States, the labor force participation rate and the employment rate.

Before the outbreak of the pandemic, the highest number of non-agricultural employment in the history of the United States was 152,504,000 in February 2020. However, in July 2022, the total number of non-agricultural employment in the United States reached 152,536 million, already exceeding the pre-pandemic level.

Even excluding government employees, the total number of full-time employees in the private sector was 129.3 million in July 2022, compared with 128.3 million in February 2020, which was already a record high, just before the pandemic. This means that the private sector has 1 million more full-time jobs than before the pandemic.

In this case, tell me —

Is employment in the United States recovering well?

In the US, there is another non-farm monthly data called “ADP payrolls”.

Automatic Data Processing (ADP), an American company founded to predict non-farm trends, collects payroll data from about half a million anonymous American companies, covering nearly 35 million American workers. Compared with the BLS nonfarm data, ADP only includes private sector employment, not government employment.

So the ADP employment data often referred to as the “small nonfarm”. Over the long run, excluding the effect of government employment, the ADP small nonfarm data has a nearly identical correlation with the official nonfarm data of more than 99 percent.

The monthly non-farm employment data is a marginal change, which is directly related to the change of the unemployment rate and corresponds to the direction of the monetary policy of the Federal Reserve. Therefore, the market usually has big fluctuations before and after the release of non-farm employment data:

If the non-farm number beats market expectations, it means that the US employment situation is better than the market thinks, the unemployment rate is lower, and then the Fed is likely to tighten monetary policy.

If the non-farm number misses market expectations, it means that the US employment situation is a little worse than the market thinks; the unemployment rate rises and the Fed may ease monetary policy in the future.


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