Instant Analysis: U.S. employment report for July
The labor market came off its hard boil in July, but it continued to simmer, creating another net +209K jobs on the month. This was somewhat below our forecast of +235K and the consensus expectations that were looking for a number around +230K. The job number for July was not as strong as one would expect given the sharp drop in initial jobless claims on the month. We have been having a good run on job creation even so.
We have had six consecutive months of job creation north of +200K a month. May and June payrolls were revised up a net +15K jobs. The stock market sees this as a Goldilocks number, “not too hot” that it will push the Fed toward an earlier rate hike, but not “too cold” that it signals a problem with the sustainability of the economic recovery.A closer look at job sectors
We see encouraging signs in the labor market that employment growth is heating up in the manufacturing and construction sectors. Manufacturing employment jumped +28K on the month, while construction employment ramped-up by a net +22K jobs on the month. But this improvement was more than offset by a softening in the pace of private services employment growth.
Next week’s ISM Non-manufacturing index for July will receive more than the usual attention. We are forecasting no change in the ISM Non-manufacturing index at 56.0 for July, but if it comes in far weaker than that concerns could grow about the sustainability of the recent job growth performance in the services sector. Services job growth remains broad-based, but was still somewhat lackluster in July. Job creation has slowed in business services, education and health, and leisure and hospitality since June.Unemployment rate edges up
The U.S. unemployment rate increased to 6.2 percent in July from 6.1 percent in June. The consensus was that the unemployment rate would remain unchanged at 6.1 percent. The increase in the unemployment rate came from weak household employment growth on the month (+131K), and an increase in the labor force participation rate.
The labor force participation rate improved to 62.9 percent from 62.8 percent where it had been since April. Signs of economic improvement have bolstered consumer confidence and appear to be bringing some discouraged workers back into the labor force. The average duration of unemployment fell again to 32.4 weeks from 33.5 weeks in June.
The earnings data was also a bit of a disappointment, suggesting that faster income growth has not yet arrived for workers. Average hourly earnings were unchanged in July and the year-on-year gains held at a modest 2.0 percent. While avg. weekly hours held steady at 34.5 hours. We are looking for stronger earnings gains as slack in the labor market dissipates.The report’s wider impact
Bottom-line, another decent employment report for July. On a letter grade scale, I would give it a solid B. The report fits with our 3.0 percent growth outlook for the U.S. economy. It gives the doves on the FOMC some cover to keep rates on the floor a little longer, and makes the hawks’ case to act sooner on interest rates a much harder argument to make.
Overall it matches well with the FOMC’s description of the current labor market, and likely means more $10 billion dollar reductions in monthly asset purchases at future FOMC meetings. Markets reacted modestly to this employment report, stocks opened flat and the 10-year Treasury yield slipped to 2.53 percent from 2.56 percent.