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Morning Report: Weaker-than expected jobs report


Vital Statistics:

Stocks are higher this morning after a weaker-than-expected jobs report. Bonds and MBS are up.

The economy added 187,000 jobs in August, which was a touch above Street expectations. The unemployment rate rose from 3.5% to 3.8%, which was the surprise of the report. The number of unemployed people also increased by 514,000 while the number of people employed rose by 222,000.

The size of the labor force also increased, rising by 736,000 which will help bring supply and demand more into balance. This pushed up the labor force participation rate to 62.8%. Average hourly earnings rose less than expected, increasing 0.2% on a month-over-month basis and 4.2% on a year-over-year basis.

This is obviously good news for the bond market, as it shows the Fed’s tightening is gaining traction in the labor market. This should hopefully take some of the pressure off the Fed to keep hiking rates and give them the confidence to let the hikes that have already happened do the job.

Unfortunately, Loretta Mester interrupted the party in the bond market by acknowledging the increase in unemployment, but stressing that inflation is still too high. “In the labor market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong,” Mester said in a speech text, adding “job growth has slowed and job openings are down, but the unemployment rate is low, at 3.8%.” So these comments mean she already knew the numbers in the report.

Apartment asking rents turned negative for the first time since the pandemic began, according to Apartment List. Rents fell 1.2% on a year-over-year basis. A massive shortage of apartment units drove rent increases in 2021 and 2022 and this has spurred a lot of apartment construction, which is coming on line now. Note we have a record number of units in 5+ buildings under construction at the moment. The vacancy rate for apartment units sits at 6.4%, which is slightly above pre-pandemic levels.

The manufacturing economy improved in August, but remains in contraction territory. “The U.S. manufacturing sector shrank again, but the uptick in the PMI® indicates a slower rate of contraction. The August composite index reading reflects companies managing outputs appropriately as order softness continues, but the month-over-month increase is a sign of improvement. Demand remains soft, but production execution is consistent with new, reduced output levels based on panelists’ companies order books. Suppliers continue to have capacity. Prices are generally stable.”

Construction spending rose 0.7% MOM, while private residential construction rose 1.4%. We are starting to see a divergence in single family versus multi. Single family rose 2.8% MOM but is down 15.2% on a YOY basis. Meanwhile multi-fam rose only 0.2% but is up 24.6% YOY. With a potential glut of new apartments coming onto the market, the focus is turning to single-family construction.

Note that Warren Buffett bought stakes in three homebuilders recently.

August Employment Report: 187 thousand Jobs, 3.8% Unemployment Rate

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