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August Payrolls Miss Expectations, but Is That Normal?

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August payrolls increase

In August, non-farm payrolls increased by 173,000, missing the Wall Street estimate of 217,000. The monthly ADP National Employment Report predicted the number would come in at 190,000. Investors should remember that ADP numbers are meant to forecast the final payroll number, not the advance number. Also, the St. Louis Fed recently put out a piece discussing street estimates for August payroll numbers and how analysts were consistently high on August payrolls.

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Private payrolls increased by 140,000, while government jobs rose by 33,000. Private services payrolls increased by 164,000, and manufacturing employment fell by 17,000. Construction jobs rose by 3,000 after rising by 7,000 the month before. Increasing construction employment bodes well for homebuilders. Health and social services employment continues to experience the largest growth, driven by aging Baby Boomers.

Overall, employment continues to increase for professional and business services. However, the growth rate is decelerating. The strong dollar has wreaked havoc on commodity prices, making things difficult for mining employment.

Bonds ignored the report. The ten-year yield was basically unchanged at 2.13%. The report was probably not good or bad enough to influence the Fed’s thinking about a September rate hike. Investors interested in making directional bets on interest rates should look at the iShares Barclays 20+ Year Treasury Bond Fund (TLT).

Are builders adding inventory?

The first-time homebuyer is making a comeback. This is good news for builders like PulteGroup (PHM) and D.R. Horton (DHI), which are big in entry-level housing. The growth in construction jobs may indicate that builders are beginning to add some inventory. However, we are heading into the seasonally slow period for builders, so any major plans will be more about 2016.

Luxury rentals continue to be a big growth story for Toll Brothers (TOL), although there seems to be a lot of foreign money piling into that sector, as it is a dollar play as well as a real estate play. The company should be the last builder to report second quarter results until builders with November fiscal years such as Lennar (LEN) and KB Home (KBH) report in September. Investors interested in trading in the homebuilding sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).

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