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Jobs and employment: Seven reasons the US picture is still weak

The health of the U.S. employment picture, despite the strong rebound in June, remains a work in progress and is still not inspiring much confidence.

Despite the gain of 287,000 positions last month, questions remain over the jobs market. Numbers that don't show up in the Labor Department's closely watched monthly nonfarm payrolls report undercut the strength that the headline number suggests:

  1. Personal income tax receipts are off 11.3 percent over the past year.
  2. Corporate income tax receipts have tumbled 16 percent.
  3. Federal excise taxes are down 0.8 percent.
  4. State sales tax collections are up just 2.5 percent, around the lowest levels in three years.
  5. Federal withholding tax receipts fell 17 percent in June.
  6. Job openings are falling.
  7. Wage growth by one measure actually is negative.

Those numbers, compiled by economist David Rosenberg at wealth management firm Gluskin Sheff and experts, point not to a sector nearing full employment but rather one that remains vulnerable to the disinflation trend that is tugging on the broader economy. The result from an investing perspective is a Federal Reserve that will continue to be on hold when it comes to interest rates.

"We were told by all the pundits and media types about how great the payroll number was in June," Rosenberg said in a note, adding that "the veracity of that report is now called into question."

Rosenberg formerly was with Merrill Lynch, where he was known as one of Wall Street's most prominent bears. He moved to Gluskin Sheff in 2009 and turned bullish on the economy in early 2011. Lately, though, his comments have taken on a more pessimistic tone.

Fiat Chrysler Auto assembly workers leave the Fiat Chrysler Warren Truck Assembly plant during a work shift change in Warren, Michigan.
Rebecca Cook | Reuters
Fiat Chrysler Auto assembly workers leave the Fiat Chrysler Warren Truck Assembly plant during a work shift change in Warren, Michigan.

"I totally understand the temptation to be bullish and constructive on the macroeconomic outlook, and try as I may to seek out the good news, all I can really see is a whole lot of downside growth risk and a whole lot of complacency at the same time," Rosenberg said.

In a missive on the jobs picture, Rosenberg also pointed out some bad news from the most recent Job Openings and Labor Turnover Survey. The JOLTS report, as it is known, showed that job openings fell by 345,000 in May, the second most since September 2008 during the Great Recession.

The survey also showed new hirings falling by 474,000 over the past three months, the most since March 2009, three months before the recession ended. Those leaving jobs voluntarily, a number seen as a sign of economic strength, fell by 60,000.

Over the past three months, job gains have averaged just 147,000. Wage growth has been subdued but improving, with the annualized growth in average earnings at 2.6 percent, according to the June report from the Bureau of Labor Statistics.

One big sticking point for policymakers

To be sure, some economists believe the declining monthly payroll gains are more the result of a labor market near full employment than they are signs of trouble.

The Atlanta Fed, for instance, said it's likely the economy now needs to create just 100,000 jobs a month to keep the unemployment rate steady. In some scenarios run by the central bank branch — with declining labor force participation and population growth — that number goes as low as 34,000. The highest level of growth needed under the most aggressive scenario to hold the rate, currently at 4.9 percent, would be 143,000.

From the market's perspective, though, the most important number is wage growth, and it's that area that remains the most stubborn and nettlesome for policymakers.

Though the hourly earnings number is showing some gain, other metrics are not.

For instance, real average hourly earnings, which compares wage growth to inflation, actually fell 0.2 percent in June, according to the Bureau of Labor Statistics. The Employment Cost Index, an indicator that Fed Chair Janet Yellen is believed to favor, rose just 1.9 percent in the first quarter (the second-quarter reading is due July 29).

'Negligible improvement' in second half

The jobs market also is unlikely to get much help from business investment, which Yellen and her Fed cohorts have cited as a significant concern. Nondefense capital goods orders are tracking for a decline of 6.3 percent annualized, which Deutsche Bank economists say is "an excellent proxy" for capital spending.

"Importantly, the recent weakness in capital spending has been broad based and not simply attributable to the energy sector. Moreover, forward-looking surveys of capital spending remain depressed, pointing to negligible improvement in the back half of the year," Deutsche economists Aditya Bhave and Joseph LaVorgna said in a recent note to clients.

"The weakness in capital expenditures has not gone unnoticed by monetary policymakers, most notably Fed Chair Yellen, who expressed concern that the deterioration in business investment could signal a desire on the part of firms to expand their operations at a slower pace," they added.

On top of all the global developments, such as June's Brexit referendum, that have scared Fed policymakers off what was supposed to be a year of consistent rate hikes, the continued job market softness will only add to their trepidation.

The Fed has been hoping to see healthy levels of inflation in the economy, but nearly a decade of ultra-accommodative monetary policy has fallen short in that regard, with most inflation gauges running below the central bank's 2 percent target.

The fed funds futures market currently assigns no chance of a rate hike at this month's Federal Open Market Committee meeting, and only a 46.5 percent chance for one by the end of 2016.