Headline nonfarm payrolls rose by 255,000 in July, versus an anticipated 180,000. Meanwhile, the June and May’s revisions are 292,000 and 24,000, respectively. The unemployment rate was unchanged at 4.9%, while the participation rate rose to 62.8% from 62.7%. There was a drop of 184,000 in the group classified as “not in the labour-force,” following a decrease of 191,000 in June. The U6 unemployment rate (an expanded measure of unemployment that takes into account marginally attached and part-time workers) was lower at 9.7% in July. The household survey showed an increase of 420,000 jobs in the month, following a rise of just 67,000 in June. Meanwhile, the adjusted household survey (the BLS’s attempt to make it more comparable to the payroll survey) pointed to a rise of 1,269,000 in July, the largest increase since February 1996 (though it also follows three consecutive declines in adjusted payrolls).
Private nonfarm average hourly earnings were 0.3% higher in July (0.3% for production and nonsupervisory workers) after a 0.1% rise in June. Annually, they are now 2.6% higher (2.6% for production and nonsupervisory workers). This increase was a little stronger than historical trend readings, but in aggregate inflation here is still moderate. Private aggregate weekly hours for production and nonsupervisory workers were 0.4% in the month, after rising by 0.3% in June; they are 1.9% higher on a year ago. The 255,000 change in July’s payrolls was largely due to professional and business services (70,000), leisure and hospitality (45,000), government (38,000), and education and health services (36,000). Meanwhile, the mean duration of unemployment was again lower at 28.1 weeks, from 27.7 weeks in June.
The employment data over the summer months always tends to be a little noisy and this year has been no exception with the very weak May report (aided by the Verizon strike) and the strong rise in June. However, this continued strength in July raises some eyebrows, given that payroll growth at this point in the cycle should be starting to decelerate as a natural result of a tighter labour market and a smaller pool of eligible workers from which to draw. Furthermore, this increase feels a little strange in the face of the weakness in corporate earnings we have seen over the last year. Historically, there has been a strong correlation between jobs growth and corporate profits, and we would not be surprised if this is playing a significant role here. Lastly, this seems incongruous with the Fed’s own Labor Market Conditions Index (of 19 labour market indicators), which has been pointing to slower payroll growth for several months now. This month’s increase in the participation rate was encouraging, following a decline from March to May (from 63.0% in March and now back to 62.6%). It is extremely important for the Fed that this continues to increase, as a large pool of returning workers means less immediate wage pressure, which should allow it to keep rates lower for longer and, in turn, allow for a more robust recovery in employment. Hence, a falling participation rate could actually put more pressure on the Fed to act sooner as it suggests there are fewer available workers to pick up the slack. Importantly, the Fed estimates that given current demographics and labour-force participation, payroll growth only needs to be around 80,000-100,000 for the unemployment rate to continue falling. We are quite clearly still well above this range. From the Fed perspective, this will come as a welcome report; consumer spending has been a little lacklustre of late, and more jobs and income should help to shore this up. In terms of tightening, it does however mean that a September increase is on the table even though it still seems a low probability.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.