Orlando's Outlook: Just right


Bottom line In a solid but unspectacular report, the Labor Department announced this morning that nonfarm payrolls rose by a weaker-than-expected 209,000 jobs in July—with an upward revision of another 15,000 jobs in May and June—marking the sixth consecutive month of 200,000 or more jobs added to the economy for the first time in 17 years, with a six-month average gain of 244,000 jobs. Moreover, the unemployment rate ticked up to 6.2%, a counterintuitively positive metric as formerly discouraged workers are starting to feel more confident about their job prospects so they are beginning to look for work again. But neither wages nor hours worked grew last month, which is certainly an ongoing concern. Importantly, we believe that the combination of the headline miss in both nonfarm and private jobs, the slower pace of household employment, the uptick in unemployment, and the flat trends in wages and hours worked are sufficiently cool metrics to keep the Fed hawks at bay, at least temporarily.

Nonfarm payrolls solid July rose by 209,000 jobs, which was softer than the Bloomberg consensus estimate for a gain of 230,000 jobs, although the Bureau of Labor Statistics (BLS) did revise May and June higher by a combined 15,000 jobs. So in conjunction with the positive revision, the Street was only slightly below the actual report. June’s preliminary gain of 288,000 jobs was revised up to a gain of 298,000 jobs.  May’s preliminary gain of 217,000 jobs, which was revised up to a gain of 224,000 jobs last month, was revised up again this morning to a final gain of 229,000 jobs. So the six-month average gain of 244,000 new jobs through July is nearly triple December’s hugely disappointing, weather-impaired final gain of only 84,000 jobs.

Private payrolls miss, too July posted a gain of 198,000 jobs, which was below the Bloomberg consensus forecast for a gain of 227,000 private jobs, although the BLS did add 12,000 jobs in May and June. June’s preliminary gain of 262,000 jobs was revised up to an increase of 270,000 last month. May had posted a solid preliminary gain of 216,000 jobs, which was revised up to a gain of 224,000 private jobs last month, and which was revised up again slightly to a final gain of 228,000 jobs. Compared with December’s weak final gain of only 86,000 new jobs, the new six-month average gain through July of  229,000 private jobs is almost triple that weather-impacted cycle trough.

Households weaken The volatile household survey added 131,000 jobs in July, down from a strong gain of 407,000 in June, but back in line with May’s addition of 145,000 jobs. The survey had lost 73,000 jobs in April. This month-over-month decline is concerning, as the household survey is also an important leading indicator for nonfarm and private payrolls. 

Wages and hours worked stagnant Average hourly earnings were unchanged in July, compared with modest 0.2% increases in both May and June. Year-over-year wages rose by 2.0% in July, which is a tick better than June’s pace. The average private work week for all employees was flat for the fifth consecutive month at 34.5 hours in July. That’s worrisome, as a change of only 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy.

Unemployment and participation tick up The unemployment rate (U3) rose to 6.2% in July from a six-year low of 6.1% in June and 6.3% in May. The labor impairment rate (U6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—ticked up to 12.2% in July. The labor force expanded by 329,000 workers in July (the aforementioned increase of 131,000 workers in the household survey and an increase of 197,000 unemployed workers, as discouraged persons re-enter the labor market). The labor-force participation rate ticked up to 62.9% from a 36-year cycle low of 62.8% in June.

Initial weekly jobless claims fall Initial weekly jobless claims, an important leading economic and  employment indicator, were revised down to 279,000 for the week ended July 19, a 15-year low. The smoother four-week moving average for the week ended July 26 fell to 297,250, which is the lowest level since April 2006.

ADP steady This forward-looking proxy for private payroll growth added a weaker-than-expected 218,000 jobs in July—vs. a Bloomberg consensus of 230,000 jobs—down from 281,000 jobs in June, which was its strongest reading since November 2012. So the trailing six-month average gain through July is 218,000 jobs. Importantly, ADP also reported that in July, small firms (with less than 50 employees) added 84,000 jobs (39% of the total); mid-sized companies (between 50 and 500 employees) added 92,000 jobs (42%); and larger companies (with more than 500 employees) adding 41,000 workers (19%). The BLS typically takes a month or longer to identify new hires from smaller companies, which contributes to the leading-indicator nature of the ADP report. 

Manufacturing accelerating As we had expected, July added 28,000 jobs, quickening the pace from June, which had added an upwardly revised 23,000 jobs, which was up from May’s addition of 15,000 jobs, April at 9,000 jobs and March only 4,000. That’s consistent with the ISM manufacturing index at a three-year high of 57.1 in July, and auto production at an eight-year high of 16.92 million annualized units. 

Construction perks up The housing market has begun to improve recently, which is starting to translate into better construction-hiring trends. Construction added 22,000 jobs in July, versus an upwardly revised 10,000 jobs in June and 9,000 jobs in May. January, in sharp contrast, had hit a six-year cycle high at 51,000 jobs added, so we’ve still got a lot of work to do to restore construction to a healthy category.     

Retail still strong After a solid Easter season, record consumer confidence and a two-year high in personal savings, retailers are positioning for a solid Back-to-School (BTS) season, adding 27,000 new jobs in July, after adding 41,000 jobs in June. May added a tepid 12,000 new jobs during the soft “shoulder” season, after adding a strong 43,000 new jobs in April and 29,000 jobs in March.

Temps continue to decelerate Temporary help, another important leading indicator of employment growth, added only 9,000 new jobs in July, down from 14,000 in June, 15,000 jobs in each of April and May, and 22,000 jobs in March. 

Education & health slows Perhaps due to summer vacations and the end of the school year, this category slowed considerably in July, adding only 17,000 jobs, compared with the addition of an upwardly revised 45,000 jobs in June and 59,000 in May.

Leisure steady This economically sensitive category added 21,000 jobs in July and a downwardly revised 23,000 in June, compared with more solid gains of 45,000 new jobs in May and 32,000 in April. 

Local hiring still drives government The difference between private and nonfarm payroll gains in July resulted in the addition of 11,000 federal, state and local government jobs last month, compared with 28,000 jobs in June and only 1,000 in May. July’s strength was once again largely driven by local government hiring, which added 12,000 jobs.