Labor market weakness points to softer household demand

From AB Capital's The Opening Bell: Three Moves

Event

Unemployment rose to 5.3% in August from 3.9% same period last year but is an improvement from July's 6.0%. Average working hours fell to 39.2 from 41.0, suggesting labor income growth remained soft despite some sequential improvement from July.

View

We think the more important signal is the economy's limited capacity to absorb new workers. Of the 897,000 people who entered the labor force, only 470,000 found jobs, while underemployment rose YoY. That combination points to weaker household purchasing power beyond the headline unemployment rate.

Catalyst

Seasonal hiring in retail and manufacturing could provide some support in 4Q, but the recovery may remain uneven. Manufacturing lost 350,000 jobs YoY for a third straight monthly decline, while a strong El Niño could reverse recent agricultural employment gains and weigh further on rural incomes.

Action

In our view, the labor data reinforce a preference for defensive and value-oriented consumer exposure (e.g. PGOLD and JFC), since weaker employment and shorter working hours can constrain real household spending even before accounting for elevated inflation. We would remain selective on discretionary retailers and lenders with faster unsecured consumer loan growth.

Disclaimer: The information, analyses, and views contained herein is based on sources which we, AB Capital Securities, believe are reliable, but is not guaranteed by us and is not to be considered all inclusive. It is not to be construed as an offer or solicitation of an offer to sell or buy the securities herein mentioned. AB Capital Securities and its Directors and Officers and/or members of their families may have a position in the securities herein mentioned and may make purchases and/or sales of the securities from time to time in the open-market and otherwise.