Was the NFP Report Really All That Hot?

Last Friday, the market was treated to a very “positive” non-farm payrolls report, as it blew expectations out of the water and showed that 163,000 net jobs were created. The result was way higher than the 100,000 median forecast (according to a Bloomberg survey) and more than two times the previous month’s 64,000 increase.

Despite concerns about the slowing pace of global growth, looming spending cuts, and potential tax increases, the details of the report showed that private employers still managed to step up their hiring. Private employers added 172,000 jobs in July as they took on more temporary workers. Meanwhile, job cuts in both the government and construction sector continued to subside.

Wages also improved. Average hourly earnings rose 2 cents (or 0.1%) to $23.52 per hour. Year-on-year, earnings are up by a respectable 1.7%.

Unfortunately, it wasn’t all good news. The unemployment rate continued to lag as it rose slightly to 8.3% from 8.2%.

The market’s reaction to the non-farm payrolls was generally positive. Sentiment was uplifted, which allowed risk assets like oil and equities to rally. Brent crude oil, which is usually used as a hedge against inflation, rose 74 cents or 0.7%. Meanwhile, the Dow Jones Index marked its third-largest daily gain of the year. The index jumped a whopping 217.29 points to close the day at 13,096.17.

Naturally, we also saw higher yielding currencies burn up the charts, with EUR/USD rising just over 200 pips on the day!

EUR/USD Chart

There are some who are skeptical about the results of the report though. After doing a little digging of my own, I can see why.

For one, while hourly wages did tick up last month, the increase was much smaller than what we’ve been seeing the previous couple of months.

Moreover, the employment-to-population ratio, which is another method of gauging unemployment, dropped last July from 58.6% to 58.4%. This means that more Dicks and Harrys became discouraged with their job prospects and basically withdrew from the rat race altogether.

Meanwhile, the jobs report indicated that about half of the 25,000 net jobs added in the manufacturing sector came from the automobile sector. In the past, car manufacturers had implemented annual summer shutdowns, leading to seasonal layoffs. The labor department normally adjusts for this by increasing the number of auto jobs.

However, word out of the assembly line is that companies have actually been cutting back on summer shutdowns, which means that less people were laid off. This in turn could mean that the NFP report could be artificially inflated.

As the old saying goes, one month does not make a trend. The sudden change in the jobs data will only cause the Fed to take even more time to make a decision on quantitative easing measures.

Keep in mind that the unemployment rate is still hovering at 8.3%, and that the United States is about TWELVE million jobs away from what would be considered “normal” employment. We’ll have to wait till next month for more data to see whether or not the labor market is truly improving or not.

In the meantime, expect Ben Bernanke and his minions to play coy with the central bank’s monetary policy plans down the road!