The Most Important Stat In The Employment Report by Eric Bush, CFA
The most important stat in the employment report each month is the index of aggregate weekly hours worked. The headline payroll employment number tells you how many people have a job. The hours worked statistic tells you many how many hours, on average, each employee worked. The index of aggregate weekly hours worked blends these variables together and is the best measure of labor input in our opinion. Last Friday, we saw a continuation of the plunge in the year-over-year change in aggregate hours. The year-over-year rate of change in aggregate weekly hours worked has slowed from 3.5% in February 2014 to just 1.05% as of August 2016 (the slowest rate since July 2010).
Markets and investor expectations move very much inline with the trend in this employment stat. For example, as the first and second chart below illustrates long bonds move with this variable very closely. In addition, federal funds futures have a strong relationship to changes in aggregate weekly hours worked. The severe deterioration in the momentum of aggregate hours worked suggests that the market doesn’t expect another rate increase by the end of the year. The December 2016 federal funds futures contract is pricing in a federal funds rate of 50 bps, which is the high end of the the current target range of 25bps-50bps for federal funds rates.
Finally, we believe the chief reason behind the plunge in US hours worked is the devaluation of the Chinese yuan. We are going to dive into the economic consequences for the US when China is devaluing as it currently is in a post later this week (we have been writing about the consequences of the devaluation from a market perspective that can be found here, here, here and here) but suffice it to say that the devaluing yuan is directly related to slowing growth, investment, employment, profits, non-oil imports, etc. in the US. It is pretty striking to see the plunge in US labor momentum since China started devaluing. US aggregate weekly hours worked was growing at over a 3% year-over-year rate in 2014 when the yuan was trading at 6.20 per USD. It has since weakened to nearly 6.70 per USD as the growth rate in US aggregate weekly hours has slowed by two-thirds.