Seasonal Adjustments Derails Rates

Last week may have been holiday-shortened, but it had several important economic reports. Most of the reports showed a weakening economy and continued to push interest rates down. Markets were hit with a shocker on Thursday with the Bureau of Labor Statistics (BLS) June Employment report when it came in surprisingly higher than expected and halted the interest rate decline. 

JOLTS: Job Openings Rise, Hiring Falls

May Job Openings and Labor Turnovers (JOLTS) came out on Tuesday and showed more job openings than expected. Just because a job opening is advertised doesn’t mean that the job will be filled. As we have discussed previously, in the post-Covid world of remote work, one job can be advertised in several markets to try to broaden the exposure.

Data showed openings rising to 7.769M, beating estimates by 469,000. Even though openings increased, the rate of hirings fell to 3.4%, near the lowest level since 2013 (removing Covid). The Quits rate is also still near the lowest levels since 2018. This is a definite sign of weakness in the labor market as people are less confident about finding better jobs.

ADP: First Job Losses Since 2023

The June ADP Employment Report showed a surprising 33,000 job losses. Markets were expecting 95,000 jobs to be created. This was the first negative reading since March 2023. May’s prior report was also revised lower. 

Small business, defined as 1-49 employees, showed losses of 47,000 jobs. Medium-sized business defined as companies with 50-499 employees lost 15,000 jobs. Large businesses showed gains of only 30,000 jobs. Mortgage rates loved the weakness as it would be likely to push the Federal Reserve (Fed) to cut rates faster.

BLS: Jobs Gain Surprises the Market

After the weakness in the ADP report, markets expected BLS to also show weakness too. They were very wrong. BLS showed 147,000 jobs created vs estimates of 110,000. When compared to the ADP’s 33,000 losses, it starts to raise questions. The BLS report showed 74,000 private sector payrolls, the weakest in quite a while. Government jobs showed an increase of 73,000 jobs, the majority of 63,000 coming from State and Local Government jobs.

Seasonal Adjustments Skew Government Jobs Data

Barry Habib of MBS Highway asked an excellent question: “How in June, when school is usually out for summer break, [are there] more education jobs added than usual?” One answer is Seasonal Adjustments (SA). We have seen these adjustments in prior reports. The SA is a statistical tool used to spread out volatility in reports so there aren’t as many large swings due to normal seasonal changes.

The BLS report shows both the SA number and the non-SA number or raw number. In this report the 63,000 State and Local Govt. job number has been seasonally adjusted, the non-SA number was actually negative 542,000. So that means there was a SA of 605,000 jobs. That is a massive difference and really draws attention to the veracity of the 147,000 number.

Household Survey: Unemployment Drops for Wrong Reason

The Household Survey component to the BLS report showed that 93,000 jobs were created but it also showed that 130,000 people left the labor force. This caused the unemployment rate to decline to 4.1%, but not for a good reason. While the BLS jobs report caused rates to slow their decline, it wasn’t as rosy a picture as it would seem on its face.

Looking Ahead: Treasury Auctions and Fed Minutes

This week is lighter on the economic data:

Tuesday, July 8: 

• NFIB Small Business Optimism Index

Wednesday, July 9:

• 10-year Treasury Auction
• Fed Minutes

Thursday, July 10:

• Initial and Continuing Jobless Claims
• 30-year Treasury Auction