The June Employment Situation Report didn't wow anybody, but the revisions to the months of May and April were noteworthy.
June nonfarm payrolls at 132,000 slightly exceeded expectations for 125,000, as compiled by Bloomberg. This kind of result would normally provide a muted impact, but the upward revisions to May and April have bond yields rising this morning. May nonfarm payrolls were raised to 190,000. In total, revisions added another 75,000 jobs to the already strong employment situation. This was the hot information that has both equity and fixed income markets adjusting lower this morning out of concern for rising interest rates.
The unemployment rate at 4.5% and average hourly earnings growth of 0.3% were in line with expectations, and continue to reflect a tight labor market. This is the kind of thing that the Fed finds unsettling, as inflation pressures mount. A hot job market is a net plus for the economy, no doubt, but the strength of this employment picture may be an illusion, in our view. The inflation pressure provided by strong employment may help to compound later economic weakness and drive a troubling stagflation situation for the Fed in months to come.
Let's look at the details...
A good portion of the strength came in the services sector, especially within leisure businesses, where we expect there was significant seasonal hiring. We're referring to amusement parks, and seasonal hiring at restaurants within beach towns etc. Companies like Cedar Fair LP (
NYSE: FUN) , Six Flags (
NYSE: SIX), Hershey (
NYSE: HSY), Great Wolf Resorts (
Nasdaq: WOLF) and Disney (
NYSE: DIS) did plenty of seasonal hiring in May. Therefore, we examine the best barometer of consumer health, the retail sector, which actually reduced labor count in June. The report showed retail dropped 24,000 jobs last month.
The loss of jobs in the retail sector may portend future employment losses within the sector as spending declines further. We cannot attribute losses in retail to gains in leisure, as many young employees come to the market after school ends, making up for the difference. We outlined our detailed economic forecast in yesterday's article "
Today's Coffee - Employment Thursday" and in our weekly copy, "
The Greek's Week Ahead - O' Say, Can You See, Our Economic Future?".
Within these articles, we point out a different near-term expectation than over the medium and long-term. We anticipate the pending arrival of earnings season will once again enthuse investors for the large cap multinational winners of last quarter, including names like Caterpillar (
NYSE: CAT) and Honeywell International (
NYSE: HON). We expect the market will rise into earnings, before inflation concerns, and possibly the release of the FOMC meeting minutes raise rate concerns and yields. This pressures stocks, and should drive another later dip. Over the long-term, we fully expect consumer weakness, and/or war in the Middle East or beyond, to drive recession. It's a complicated picture appropriate for a dynamic marketplace.
One final note...
June's employment status worsened from May and April, and that change should be noted as well. The devil's advocate would now respond that June too could be later revised higher, but we do not think so. Eventually, labor heavy housing has to consolidate, and the sector, which is burdened by strong unions, must eventually give way. Home builders have operated on the illusion that their industry could recover quickly, but as we've explained time and again here, the titanic of a ship that is the housing sector does not make tight turns. The iceberg striking the housing sector is much larger beneath the surface than what we see above. If exposure is necessary, we would stick with the union light Toll Brothers (
NYSE: TOL), over players like Beazer Homes (
NYSE: BZH), D.R. Horton (
NYSE: DHI) and Lennar (
NYSE: LEN). Housing added 12,000 jobs in June, and this just cannot continue, in our view. Eventually, home builders will have to face up to their reality or be sunken by their iceberg.
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