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Portfolio Update

How Strong is the US Labor Market?

By Elliott H. Gue, on Aug. 10, 2016

The Bureau of Labor Statistics (BLS) last Friday reported that private nonfarm payrolls increased by 217,000 jobs, compared with the Bloomberg consensus estimate for 170,000 new positions.

In response to this upside surprise, the futures market has priced in a 26 percent chance that the Federal Reserve will hike interest rates by Sept. 21, 2016, and a 49.2 percent probability of a rate increase by the Federal Open Market Committee’s December meeting.

Despite the bullish employment numbers for July, investors should remember that monthly employment data can be subject to significant revisions over time.

And the long-term trend in job creation isn’t as encouraging: The US added an average of 251,250 jobs each month in 2014, compared with 228,667 positions per month in 2015 and 186,000 over the first seven months of 2016.

(Click graph to enlarge.)BLS Employment Data

This steady decline in job creation could reverse if the recent strength in payrolls continues through the fall.

Meanwhile, the monthly payroll data provided by Automatic Data Processing (NYSE: ADP), America’s largest payroll-processing outfit, doesn’t confirm the strength in the official numbers released by the BLS.

Although the ADP data shows unusually weak payroll growth in April 2016, the post-dip recovery in job creation falls decidedly short of the BLS estimates. In fact, the six-month moving average of payroll gains reported by ADP slid to its lowest level in more than six years.

(Click graph to enlarge.)ADP Employment Data

This divergence doesn’t suggest that one estimate is more accurate than the other. Differences in the seasonal adjustments that ADP and BLS use to account for recurring trends in US employment—for example, the hiring of seasonal workers during the holidays or temporary closures of auto plants for retooling—could be the cause of this disparity.

Incoming data suggest that the economy has improved over the past few months. However, US gross domestic product expanded by 1.2 percent in the second quarter, 0.8 percent in the first quarter and 0.9 percent in the fourth quarter of 2015. Weak economic growth has forced the Federal Reserve to backtrack on planned rate hikes on several occasions over the past year.

We doubt the US central bank will announce a rate increase in September. A December hike would likely require conclusive evidence that the rate of US economic growth has improved from its current lackluster pace. Given the stop-start nature of this recovery, stringing together a solid run of positive economic data could be a challenge.

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