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Back on Track: July Jobs Bury the Springtime Stumble
Friday, Aug 05, 2016

The upside surprise in the July jobs numbers lays to rest any lingering concerns about pre-Brexit momentum in the U.S. labor market. Whatever the headwinds and uncertainties from abroad, the U.S. labor market’s basic resilience appears intact. Overall U.S. economic growth remains modest and companies may be shying away from other investments, but clearly they are not afraid to expand their payrolls.

There was strength throughout the July jobs report, with only a few signs of weakness in some predictable areas. Most notable, of course, was the headline nonfarm payroll growth of 255,000, which brings the three-month average to 190,000 – almost exactly where it stood in April, before the anomalous May jobs report. While the July headline was a bit lower than June’s 292,000, the breadth of gains across industries expanded slightly – the diffusion index for private hiring rose to 63.7% from 61.8%.

There was no material impact from Brexit or the modest strengthening of the U.S. dollar. Job gains in manufacturing and hospitality moderated slightly but remained positive, while the energy-heavy mining and logging sector shed 7,000 jobs for the second straight month. Notably, almost all other sectors continued to expand, and a few even accelerated relative to June.

The unemployment rate held steady at a healthy 4.9% with rounding, but the number of people reporting they were unemployed in the household survey actually declined modestly (technically the rate fell to 4.878% from 4.899%). This was especially encouraging given the uptick in labor force participation (to 62.8% from 62.7%): even as the ranks of job seekers swelled by 407k, more of them were able to find a job.

Just about the only weaknesses in this report were the increases in part-time work and in the number of long-term unemployed. The increase in part-time work underlines concerns about underemployment and the quality of jobs that are being created, and lingering long-term unemployment has been a source of concern for years now. In that sense, this jobs report reinforces the conventional wisdom about both the strengths and the weaknesses of today’s jobs market.

The increase in average hourly earnings was in line with expectations and keeps overall wage growth at the upper end of its recent range. While 0.3% growth month over month is pretty strong, the year-over-year rate held steady at 2.6%, since a large increase in July 2015 fell out of the year’s cumulative gains.

This strong employment report will surely increase the Fed’s confidence that it can proceed with another rate hike this year, but it can afford to wait for the September jobs report before tipping its hand. Facing headwinds and uncertainty from abroad, and following a recent reversal of course, the Committee will likely prefer to see a clear signal that the economy is overheating before resetting market expectations, which currently are for a December hike.

Fed policymakers have plenty of opportunity to start shifting those expectations, from the minutes of the July meeting to the Jackson Hole conference later this month, but their prior comments have not suggested they were waiting for the July jobs numbers to set the tone. Indeed, strong job growth combined with last week’s weak second-quarter GDP figure will only reinforce concerns about productivity growth that the Fed has previously cited in taking a cautious approach to rate hikes.

about the author

As chief economist at iCIMS, an industry-leading provider of talent acquisition software, Josh Wright leads a team of data scientists in analyzing emerging trends in the U.S. labor market