MST Econ-Blog: June Job Creation Outpaces Projections by 100,000
Guest blog by Tom Cunningham, Economist
As employment is a key factor in projecting loan portfolio performance, current employment statistics and longer term trends are likely to be primary considerations for most banks and credit unions as they incorporate forward-looking economic factors in their expected financial asset loss projections.
Altanta, Georgia – July 8, 2016 . . . As distressing as was the May jobs report, labor market observers were jubilant over this morning’s June statistics. The Bureau of Labor Statistics’ report of 287,000 new jobs created in June was 100,000 above what had been expected. Overall, strength was reasonably widespread, gains stretching across most business sectors; the only sector losing jobs was mining. The report was strong enough to suggest that May’s weakness was an anomaly.
The headline unemployment rate (U3) rose 0.2% to 4.9%, which includes some of the unemployed who had previously left the labor force and are now returning. A 4.9% headline unemployment rate is consistent with the overall message of a fairly healthy labor market. The stronger job market was reflected in the larger measure of labor underutilization, U6, which declined 0.1% to 9.6%. The spread between U3 and U6 remains wide but continues to shrink.
Revisions to previous months accompany the current month’s report. May’s job creation report was revised down to +11,000; April’s was revised up to +144,000. A strike at Verizon of just under 30,000 telecom workers accounted for some of the May weakness and an equal return this month.
Brexit remains a cloud over our medium term outlook. The U.S. could pick up employment in financial services as the world reconfigures some activity away from London. On the other hand, our export industries will face a headwind from a strong dollar. We won’t see these effects in any one particular month, but they’ll soon be a factor in interpreting employment changes, particularly in those two segments of the U.S. economy.
Just as we warned not to get overly excited about the bad May jobs number, you don’t want to get too excited about a strong number, especially when it follows a strangely bad previous month. For example, wage growth in June was less than in May. The most appropriate conclusion to draw from today’s release is likely that last month’s weakness was a one-off aberration. But that doesn’t do anything about the huge uncertainties of Brexit and our own election. So there wouldn’t be anything here to justify a change in loss projections. It’s good that some uncertainties were reduced, but the big ones still await resolution.
Considering Economic Factors under CECL
Under CECL you will be required to consider economic factors in determining future expected loan losses. The MST Virtual Economist is an efficient, automated way to evaluate qualitative economic factors and project their impact on the institution’s loss rate, find new variables that impact the loss rate and determine the relevance of the economic factors you are already using to make qualitative adjustments. Click here for more information on the Virtual Economist or schedule a demo below.
More with Economist Tom Cunningham
You’ve heard of TED Talks, those quick videos filled with information that makes you think. Now there are MST Talks, short videos on ALLL, CECL and everything you need to know about transitioning from an incurred to an expected loss allowance model. The videos are interviews with the industry experts who presented at the MST 2016 National ALLL Conference in May. We will release the series, one by one, over the coming weeks. This first release, “Creating Reasonable and Supportable Forecasts,” features commentary from Tom Cunningham, retired Senior Economist with the Federal Reserve Bank of Atlanta, with insights on understanding what economic variables apply to your loan portfolio. Click here to view.