ZIM - 3 Key Takeaways From August Nonfarm Payrolls Report

2023-09-01 10:35:09 ET

Summary

• U.S. nonfarm payrolls increased by 187,000, lower than the average monthly gain over the past year.
• The BLS revised down the employment figures for June and July, raising concerns about data manipulation.
• The labor force participation rate increased slightly, which could ease unemployment constraints but also contribute to inflationary pressures.
• Report is bullish on construction, manufacturing and healthcare, bearish on information, telecom, transportation and warehousing.

Investors will like the U.S. nonfarm payrolls increase of 187,000. This lagged the average monthly gain of 271,000 over the prior 12 months. Before diving into the details, readers should focus on the previous NFP revisions, the participation rate, and the wage growth.

1. Nonfarm Payroll Revision

In the last paragraph of the NFP report , the Bureau of Labor Statistics posted a change in total nonfarm payroll employment for June. It revised the figure down by 80,000, from +185,000 to +105,000. The change for July was revised down by 30,000, from +187,000 to +157,000. The impact of those revisions is employment in June and July combined is 110,000 lower than previously reported.

The BLS explained that monthly revisions result "from additional reports that it received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors."

Skeptics may argue that this opens the door for manipulating statistical data. Since the stock market, especially the S&P 500 ( SP500 ) reacts immediately to the published BLS data investors have no choice but to do the same. Similarly, the Federal Reserve counts on today's headline NFP report to guide its monetary policy. Expect the Fed to follow through with a 25 bps rate hike before the end of the year.

2. Participation Rate

Ahead of the student loan moratorium ending, the BLS reported the labor force participation rate rose by 0.2 percentage points to 62.8% in August. It has been flat since March. The employment-population ratio did not change over the month at 60.4%.

Paying back the student loan will decrease consumer disposable income levels. Footwear and accessories firm Nike ( NKE ) is on a downtrend ahead of the loan forgiveness ending. Foot Locker ( FL ) lost one-quarter of its value in the last month after cutting its guidance and suspending its dividend . Companies that sell nice-to-have goods are not the only firms in trouble. Thrift store Dollar General ( DG ) reported a second straight quarter of under-performance.

Falling disposable income is only partially responsible for the weakness in DG stock. It already had weak quant grades before issuing the warning.

Expect the slightly higher participation rate to continue in the coming months. This will ease ongoing low unemployment constraints. However, the increase in workers will lift demand levels, adding to inflationary pressures. The Fed will keep interest rates higher than stock buyers expected.

3. Wage Growth

Average hourly earnings are up by 0.2% to $33.82. In the last 12 months, average hourly earnings increased by 4.3%. The strength in wages for construction and manufacturing is worth highlighting. The housing market remains robust to support strong construction activity. The Fed's interest rate hikes have yet to weaken demand.

The U.S. has a long-term plan of slowly bringing manufacturing activity out of China and back to the country. With low unemployment rates and room for participation rates to grow, expect manufacturing wages to continue to rise.

Employment Growth in August

The BLS reported health care, leisure and hospitality, social assistance, and construction jobs increasing in the month. This might infer that Caterpillar

( CAT ) is a stock to buy. Shares already rose by 56.65%, decreasing its valuation score.

Still, expect Caterpillar to report continued growth and profitability.

Jobs grew in the healthcare sector, with 97,300 employed. Investors may consider looking at beat-up stocks in the healthcare plan sector instead. For example, UnitedHealth Group ( UNH ) gave back half of its monthly rally on no news. Cigna ( CI ), which trades at a better valuation, also fell after peaking at over $300 last month. The valuation grade below shows that UNH stock is relatively inexpensive on a P/E GAAP measure:

CI stock:

Employment Decline

Employment in transportation and warehousing declined. It lost 34,000 jobs in August. Employment in truck transportation fell sharply by 37,000. The BLS said it reflected a business closure (of US trucking firm Yellow Corporation). This is a bearish indication that various sectors are facing weaker demand. Firms may also have too much supply they are still working down.

Readers who watched ZIM Integrated Shipping ( ZIM ) lose 29% of its value YTD already expected weakness in the shipping and transportation sector. This will continue as current interest rate levels in the 5% range persist.

Within Information employment, down slightly by 15,000, the job decline in motion picture and sound recording industries is temporary. Jobs declined by 17,000 as a result of strike activity. Investors should anticipate higher wage costs for entertainment firms like Paramount Global ( PARA ) and Warner Bros. Discovery ( WBD ) to weigh on their cash flows. More worrisome for those firms is their debt levels. Still, entertainment firms are increasing subscription rates and cutting costs to ensure adequate coverage for interest on debt.

The telecommunications sector continues to lose jobs, falling by 4,000 in August. AT&T ( T ) recently bottomed at $13.43 and found support at $14.00. Verizon ( VZ ) is trying to break out of a downtrend. And T-Mobile ( TMUS ), despite its strong growth, still needed to cut its workforce by nearly 7% or by 5,000 positions.

T-Mobile said that the pace of merger synergies did not offset the materially higher expenses required to attract and retain customers.

Your Takeaway

Markets would want the Fed to pause interest rate hikes due to the higher unemployment. However, wages are growing and worker strikes are on the rise. In the coming weeks, expect news about the UAW strikes in the automotive sector to dominate the headlines. This is a reminder that corporations must grapple with higher wage costs amid the prospects of a weakening economy.

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