It looks like the bumpy road to recovery shall continue on…and I guess we may have to redefine what ‘recovery’ truly means in our new normal….the labor participation rate has become an interesting piece of this equation and the chart appears to indicate that it has been working its way down for sometime now – with maximum speed occurring since the end of the Great Recession…is it the baby boomers, increasing government assistance levels, disenchantment – not sure what the complete answer is to this data set. 

 

Lowest Labor Participation in 31 Years

Payrolls for the month of August were a big disappointment after several very positive preliminary reports (ADP, claims, ISM non, etc…).  Nonfarm payroll growth came in at just 96k, lower than the expected 130k.  There were also negative revisions to the previous two months’ reports, down 22k in July and down 19k in June.  Excluding a 7k loss of government employees, private payrolls grew 103k in August.  Manufacturing payrolls dropped 15k on the recent slowdown in the sector.  In the household report, the unemployment rate fell to 8.1% from 8.3%. This is confounding as the number of employed persons fell 119k in the household report.  In fact, the reason the unemployment rate fell is a continuation of the recent trend – a drop in the labor force participation rate.  The number of people in the labor force fell 580k and the labor force participation rate dropped to 63.5%, its lowest level since 1981. Average hourly earnings were flat for the month bringing the YoY growth rate in earnings down to 1.7%.  Hours worked also fell to 34.4 per week.

 

Bottom Line: This is a very weak set of labor reports andwill keep the Fed primed for action next week.  We expect rate guidance is a given (adjusting the language of the FOMC Statement) and asset purchases remain a toss-up, at least the timing of the purchases is a toss-up.  A third round of purchases may well be announced next week, but the Fed may try to drag its feet to wait on the elections.  We are leaning toward purchases occurring but are not overly convicted of that sentiment.  Treasury yields have snapped lower after the report. The 10-year yield rose as high as 1.739% yesterday after the ECB announcement, but has rallied back to 1.63% this morning.    

 

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