While payrolls growth remained above the 200k mark in July, a rise in the unemployment rate and unexpectedly weak average earnings fits nicely with the view recently outlined by Fed chairman Yellen. The labour market continues to improve, while still being consistent with weak wage growth and hence a highly accommodative monetary policy.
With another solid rise in payrolls today’s jobs report is generally positive for the growth outlook, but tame earnings data will reinforce the case of Fed officials arguing that tightening is still a long way away.
Market implications
Overall, the report should send bond yields lower and weaken the USD in the near term, in line with the initial market reaction after the report was released.
Key take-aways from the July jobs report
July payrolls rose 209k and the net revision to the two prior months was +15k, so the net increase was 224k, slightly weaker than the consensus forecast of 230k. Our estimate was 235k.
Thus, with another solid rise in payrolls the report supports our view that the US economy continues to improve despite the geopolitical unrest. We continue to expect payroll growth in the coming months to exceed the 200k mark, which was the norm last year. Anything over 125k jobs per month will keep the unemployment rate trending down unless the participation rate starts increasing sharply (something we don’t expect). In the last six months the average payrolls gain amounted to 244k, the strongest pace since 2006.
The unemployment unexpectedly rose to 6.2%, above the 6.1% consensus and up from June’s 6.1%. But the details were better than suggested by the headline number, with a 329k rise in the labour force, while the household survey employment measure increased 131k after an outsized 407k gain in June. Our unemployment forecast was 6.1%.
The labour force participation rate rose 62.9% from 62.8% in June, which was a three-decade low. Despite the rise in July we believe that the participation rate is unlikely to start trending sharply up again as any positive cyclical impact on participation will continue to be balanced by the impact of an aging population.
Within the unemployment rate, short-term unemployment (less than 27 weeks) rose to 4.2% after 4.1% in June, still close to the 4% level seen in early 2008 when the recession started. The long-term rate was unchanged 2.2%. The low level of short-term unemployment is especially noteworthy because it has tended to be much more important for wage pressures than long-term unemployment.
The biggest surprise in today’s report was that average hourly earnings for all private employees were flat in July, weaker than both the 0.2% average for this expansion and the 0.2% consensus estimate. Our call was 0.3%. Annual wage growth of all private employees was unchanged 2.0%.
Finally, the average workweek was unchanged 34.5 hours in July. Overall private wage income (hourly wages multiplied by hours worked) rose 0.2% in July, the weakest gain since February.
Nordea