"Looks Like A Stagflation Report": August Private Payrolls Miss Huge, But Hourly Earnings Jump

In our preview of the August jobs report we warned that while census hiring was a potential positive wildcard to today's print, it was the seasonals that were a major negative risk, with August jobs missing consensus in 8 of the past 10 annual prints.

Well, make that 9 of the past 11 and even with census hiring, because moments ago the BLS reported that in August, a total of just 130K payrolls were added, with hiring for census accounting for 25,000 of the total, sharply below the 160k expected. Oddly, the picture presented by the Household Survey was vastly different, with the number of employed workers surging by 590K, to 157.878 million as the labor force soared by 571K, suggesting the US has a way to go before hitting full employment.

On a year-over-year basis, the rate of growth payroll growth was just 1.4%, the lowest since August 2011.

However, it was the private payroll subset that was especially disappointing with the 96K print far below the 150K expected, and far below last month's downward revised 131K. Worse, on a YTD basis, the number of private jobs created in 2019 is the worst going back at least 6 years.

Additionally, as Bloomberg notes the one-month diffusion index, which shows the breadth of hiring, slumped to 53.5 in August for private employers. "That's the weakest since May 2016 and not a good sign for the job market."

That was the bad news, the good news is that average hourly earnings, were stronger than expected on both a sequential and annual basis - rising 3.2% YoY and 0.4% MoM, for all workers even as the average workweek actually increased this time, rising from 34.3 to 34.4, in line with expectations. Earnings for production/non-supervisory workers also rose 3.5% YoY after 3.4% in July.

Some more good news: the unemployment rate held steady at 3.7%, with the black unemployment dropping to a new all time low.

Also in the good news column: the participation rate jumped from 63.0% to 63.2%, matching the highest since February.

Looking at the composition of job increases in August, one thing that stuck out was that retail payrolls declined for a seventh straight month, matching the longest streak since 2009. Offsetting the Amazonification of America, manufacturers continued to add jobs, though at a slower pace with August factory payrolls rising 3,000 after a downwardly revised 4,000. Meanwhile, the leading indicator for future job growth, temporary help agency employment, jumped by 15,400 after falling the previous three months and raising concerns of broader labor-market weakness.

Commentary on the report ranged from optimistic to pessimistic, with Deutsche Bank's Torsten Slok saying on Bloomberg TV that it "Looks like a stagflation report," calling the jump in U6 - a more expansive definition of the unemployment rate - concerning.

Pantheon Macro's commentary was along similar lines: "The payroll details are worse than the headline, Private payrolls rose 96K, the smallest gain since May. surveys pointing unambiguously to much slower payroll growth over the next few months, the chance of a sustained rebound is slim."

Yet others were less pessimistic, few had anything good to say about today's report: "This was a meh jobs report. But the Household survey was considerably stronger than the Establishment survey. The employment-to-population ratio has jumped to a cycle high. Labor market conditions are still improving, on net, albeit more slowly than before."

Bloomberg Economics Associate Eliza Wing echoed the "meh" sentiment: "Weaker business confidence spilled over to slower private hiring. While aggregate hours rebounded and hourly earnings popped, aggregate income creation - the product of aggregate hours worked and average hourly earnings - stayed relatively low. The cooling trend is a powerful signal that consumers will drive the expansion with reduced vigor in the months ahead."

The question then is what does this do to the Fed's rate cut calculus, and the answer is - nothing, because while a 25bps rate cut is now in the bag, the number was nowhere near bad enough for a 50bps rate cut; and since 25bps is fully priced in by the market if anything there may be some modest disappointment in stocks as the case for 2 rate cuts on Sept 18 completely fizzles.