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July Payrolls: Cracks in the Armor?

August 2, 2019

The primary message of the July jobs report is that the labor market has remained basically healthy, but slower income growth still raised concerns about the all-important outlook for consumer spending. Payroll growth is in line with this stage of the business cycle, but moderate wage gains and a decline in both hours worked and the employment-population ratio all raise uncomfortable questions. This report will reassure policy makers in that it provided no major surprises, but it won’t give them anywhere near the confidence they need to push back on market expectations for further rate cuts.

Headline Numbers:

  • 164k rise nonfarm payrolls. Downward revisions brought the 3-month moving average to 140k, versus a previously-reported 171k.
  • 3.7% unemployment: nominally flat, but the third straight minor increase. Fortunately, that was associated with a rise in labor force participation and a decline in “under-employment.
  • 3.2% annual growth in average hourly earnings – a slight pick-up from 3.1%, but overshadowed by a decline in average weekly hours (34.3 versus 34.4 prior). 

Key Takeaways:

  • Solid jobs numbers, but some worrying signs for consumer income. The headlines were mostly good, and the household survey was quite strong, but flattish wage growth and fewer hours worked mean a slowdown in consumer income gains. That could be an issue for consumer spending going forward, and may be a sign of business confidence softening even ahead of the latest tariff threat from the White house. As it is, Q2 GDP already showed a drop-off in business fixed investment.
  • Payroll growth in line with this stage of the business cycle: Payrolls’ 3-month average has bounced between 140k and 160k since April. That’s significantly slower than 2018’s average of 223k, but only moderately below the 2017 average of 180k. While the slowing is mostly due primarily if not exclusively to the cyclical pattern, it’s hard to tease out that effect from business confidence suffering from global headwinds and trade tensions.
  • Wage growth ticked up, but is still below the early-2019 pace. The mystery of missing inflation has confounded the economic establishment for several years now, but given that wage growth had a pick-up in 2018, this relapse could be a sign that the headwinds have already been taking a slight toll on the U.S. labor market. It could be that the 2018 uptick was an aberration related to fiscal stimulus and we have simply returned to the milder trend, but the decline in the prime-age employment-to-population ratio is an ominous sign that more could be at play.
  • The inflation puzzle persists: A number of factors have been cited for stubbornly low inflation, but no new theoretical framework has replaced the traditional “Phillips curve” view of the relationship between inflation and unemployment. Global labor markets and new automating technologies likely play some role, but ultimately there’s a question about business confidence in a world where advanced economies grow more slowly (whether due to demographics, technology, or trade barriers). Employers will only raise wages if they think they can get a return on the investment, and right now, they are voting with their wallets.
  • The household survey was strong overall, but that should be seen as partially correcting for some overstated weakness in the prior few months. Labor force participation continues to be rangebound mostly between 62.7% and 63.0% (and now back up to the latter figure), as it has been since late 2013. There were encouraging declines in involuntary part-time work and the related “U6” under-employment rate (to a new post-recession low of 7.0% from 7.2%). Also, there were signs that employers are still reaching to hire those with less education: unemployment rates declined for those with less education.
  • Goods-producing job growth still slowing: Manufacturing had a good month (16k vs. 12k) and construction was decent (4k vs. 18k). Still, these payroll gains weren’t strong enough to reverse the overall trend of cumulative job growth rates in goods-producing industries slowing. That’s another sign of the impact from trade tensions and soft energy prices (which are themselves a sign of slower global growth). Manufacturing hours declined, but that mostly served to underline outstanding concerns from the ISM Manufacturing and other surveys. Remember that while goods-producing sectors are a minority of the U.S. labor market, they punch above their weight economically and politically.
  • The few other disappointments in payrolls were otherwise notable primarily as exceptions to the rule. Payrolls declined for retail trade (-3.6k), information (-10k), utilities (-400), and mining and logging (-5k). The decline in mining is unsurprising given soft oil prices and concerns about global growth. Retail continues to suffer from a structural transition. Retail payrolls have declined every month since January.
  • Consumer outlook still decentThis is still a pretty encouraging report overall, indicating that there is a lot of domestic momentum in the U.S. economy and that the U.S. consumer will still be powering growth for some time – even in the face of various headwinds. The downsides take up extra real estate because they need more explaining, but the headline numbers are still the core of the message here.
  • Policy outlook still precariousTrade news and market fears will continue to dominate. The Powell Fed’s insistence on its technical independence from the White House looks genuine, but Powell is getting outmaneuvered. The President may have figured out that he can engineer exogenous shocks to financial markets and even the economy as a whole, and that those will force the Fed’s hand. Ultimately, the Fed has to respond to threats to its dual mandate, no matter where they come from. It has no mandate to push back on other policy makers if they take risks with the U.S. economy; it just has to support the growth outlook as best it can, come what may. This is not unlike how the Fed has previously felt forced to support the economy in the face of fiscal austerity – not a happy place, but that’s the job.
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