The employment situation for June 2015 was released on July 2, 2015 and nonfarm payroll employment increased by 223,000 in June 2015. This article discusses the key points to note in the report and the implications of the overall report on the timing of rate hike. The article also discusses the impact on the job report on equities and specific sectors.
Coming to the headline numbers, in the last 12 months, nonfarm payroll employment has increased at an average of 250,000 and the June 2015 employment increase (223,000) was marginally lower as compared to the average. However, the headline unemployment rate declined from 5.5% in May 2015 to 5.3% for June 2015. While I am not so concerned about the marginal decline in nonfarm payroll employment as compared to the prior month’s average, I am certainly worried about the problem related to people exiting the labour force.
To put things into perspective, the number of people not in the labor force increased from 92.9 million in May 2015 to 93.6 million in June 2015. At the same time, the civilian labor force participation rate declined from 62.9% in May 2015 to 62.6% in June 2015. In my view, both these data are points of concern and have been concern areas for a long time. However, the improvement in these numbers is independent of a rate hike.
The civilian labor force participation rate in the United States peaked at 67.6% in April 2000 and has been trending lower ever since. I admit that the decline in labor force participation accelerated after the crisis. However, demographic factors have resulted in the long-term downtrend.
The major issue is how much the people in labour force earn in order to offset the increase in people not in labour force. In other words, if the per capital income declines steeply due to an increase in people not in labour force, the overall consumption in the United States is also likely to decline. Lower interest rates will not encourage spending as households would rather try to increase their savings rate. This is reflected in the recent past where US personal savings rate has increased along with an increase in disposable income, which has been a result of lower energy prices.
Coming back to the employment report, the healthcare sector added 40,000 jobs in June 2015 and employment in healthcare has grown by an average of 34,000 per month over the prior 12 months. Considering the same demographic factors, the healthcare sector will remain steady in the United States and will continue to generate jobs. Relatively high spending in healthcare ensures that consumer non-discretionary spending remains robust and provides support to GDP growth. From an investment perspective, exposure to the healthcare sector is important from two perspectives – First, growth in the sector is likely to remain steady and is recession proof and second, with markets trading near record highs, exposure to a defensive sector is required. Investors can consider exposure to the Vanguard Healthcare ETF (VHT) for broad exposure to the sector.
Amidst the gloom about increase in people not in labour force, the employment in retail trade increased by 33,000 in June 2015. Retail sales edged higher marginally in April 2015 and at a strong pace in May 2015. In my view, the positive trend in the retail sector is likely to sustain and is indicative of the point that second quarter GDP growth will be robust. It is important to note that personal savings rate has increase in the recent past, but consumers have also leveraged. According to a Wall Street Journal report –
Outstanding consumer credit — reflecting Americans’ total debt outside of mortgages—rose by a seasonally adjusted $20.54 billion in April, or at a 7.33% annual rate. The latest increase reflected a sharp rise in revolving credit, reflecting mostly credit-card debt, which increased at an 11.57% annual rate. That marked the second-biggest jump since the recession ended nearly six years ago.
Therefore, leverage backed retail spending might have driven retail sales growth in the recent past. This is not a point of concern as long as jobs are being created in the economy and consumer confidence remains high. From an investment perspective, I would consider exposure to the Vanguard Consumer Discretionary ETF (VCR, Financial) and Vanguard Consumer Staples ETF (VDC, Financial). These investment options will remain attractive as long as consumer confidence remains elevated and consumer spending continued (leveraged or savings backed).
From a broad market perspective, I continue to remain positive on U.S. equities (SPY) after the employment report. While the contraction in labor force has nothing to do with an increase in interest rates, policymakers are likely to further delay a rate hike. In my view, December 2015 or early 2016 is the likely timing of rate hike. Therefore, markets are unlikely to have rate hike jitters any time soon and with robust GDP growth expected for 2Q15, the markets are likely to trend higher. I therefore maintain my positive view on US stock after the employment report.
