Despite the mixed headlines, the July jobs report was a strong one. Various details and simple adjustments tell the tale, from specific industries -- notably manufacturing -- to wages. There was no sign that trade tensions are slowing job growth, and the household survey indicated that labor demand remains robust enough to push employers to continue reconsidering their hiring requirements.
- Nonfarm payrolls rose by a modest 157k -- still well above most estimates of labor force growth -- but net upward revisions of 59,000 to the prior two months brought the 3-month average to 224k from a previously reported 211k.
- The unemployment rate dipped back below 4.0% to just under 3.9% amid a slight increase in labor force participation and declines in under-employment and involuntary part-time work.
- The 2.7% growth in average hourly earnings was an understatement. Adjusting the wage number upward for the calendar quirk would put it at or slightly above the 2.8% that marks the top of its post-recession range.
- About that 157k headline... The revisions kept the 3-month average at a level higher than any seen in 2017. In addition, July's headline payrolls were suppressed by healthcare & education (22k vs. 69k prior) -- sectors that are probably the least cyclically sensitive or otherwise of concern. Adjusting for that alone would put the headline payroll number over 200k. In addition, the employment diffusion index printed a strong 64.0, compared to an initially-reported 65.5 in June (revised up to 67.4).
- Still no sign of trade impact yet: Manufacturing job growth remained strong, and most of the manufacturing subsectors that contracted were not of particular concern (maybe primary metals, but furniture?). This seems a testament not only to the strong momentum in the U.S. economy but also to the flexibility of its labor markets. Employers are naturally more willing to hire when they aren't concerned about their ability to lay off those workers down the road.
- The rebound in retail payrolls (7.1k vs. -20.2k) was restrained primarily by a drop-off in the sports/books/leisure category that looks anomalous. Now that Amazon has already cleared out so many bookstores, most analysts are more concerned about department and merchandise stores, but that category actually posted a nice rebound from June. Interestingly, wholesale trade was one of the few sectors to accelerate (12.3k vs. 8k), while transportation/warehousing contracted (-1.3k vs. 18.9k).
- Ride-hailing apps taking a toll? It's tempting to blame the 14.8k decline in transit and ground passenger transportation payrolls on Uber and its ilk, but let's see how next month goes. There's no obvious reason that ride-hailing apps' impact would have spiked this July.
- Unemployment reverting to trend: No one seemed to think the rise to 4.0% meant much, so why would we make a fuss over 3.9%? While it has slowed and is always subject to noisy bounces, the trend remains modestly but clearly downward in the face of strong payroll growth. Wake me up when we hit either 3.7% or 4.1%, or wages finally accelerate their gradual pace of increases.
- Employers continue to lower their standards: The "less than high-school diploma" category saw the largest decline in unemployment rate relative to other educational categories (-0.4 percentage point vs. -0.2 and -0.1 for others). The 175k decline in involuntary part-time work looks like a related development, with employers coughing up more permanent contracts. Still, reentrants to the labor force declined 287k, underlining concerns about how many more people this tight labor market can lure back. Increasingly, it appears that all that hand-wringing about “qualified candidates” is code for “wishlist candidates” and we are only now discovering what employers truly consider to be employable candidates.
The Federal Reserve's policy statement already sucked the wind out of this report. With policymakers' hand-waving about recent unemployment prints staying low and inflation remaining near 2%, and market-implied expectations for a hike in September above 90%, there's little mystery here. The December meeting is the big question mark, and we have months of data between now and then. More touch-and-go are the wage numbers and any signs that trade tensions are having an impact, for which all eyes will remain peeled. In the meantime, look for more signs of employers getting creative as they struggle to attract workers while managing their costs