Orlando's Outlook: Another solid jobs report


Bottom line The labor market continued to hum along in July, with today’s employment report showing better-than-expected results across the board, completely consistent with near-record low survey-week jobless claims last month. Highlights include strong nonfarm and private payrolls in July (with positive revisions in June), a surge in household employment and excellent sector hiring trends in manufacturing, leisure, education & health care and temporary employment. In addition, the participation rate ticked up for the second consecutive month, and the official unemployment rate (U-3) moved down a tick down to a 16-year low.

So the job-creation trend we discussed last month remains firmly in place. Looking at the first seven months of 2017—excluding March’s weather-impaired gain of only 50,000 jobs—the other six months have produced average payroll growth of a healthy 207,000.

As a result, Federal Reserve Chair Janet Yellen should feel confident when she ascends the podium at the Fed’s annual monetary policy symposium in Jackson Hole, Wyo., Aug. 24-26. We still expect Yellen to lay out her plans for the second half of this year at that meeting. We believe those will include beginning to unwind its $4.5 trillion balance sheet in September and hiking interest rates in December.

Jobless claims remain low Initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended July 15 were 234,000, not far from the 44-year cycle low of only 227,000 set in February. That’s also down from 242,000 for June’s survey week, and last week’s report was not far off at 240,000. We continue to watch automotive industry claims data closely, as these companies tend to shed jobs and announce furloughs in the summer.

Solid surprise for July’s nonfarm payrolls The U.S. added a much stronger-than-expected gain of 209,000 jobs in July, significantly above the Bloomberg consensus of 180,000 and our own 182,000 estimate here at Federated. The Bureau of Labor Statistics (BLS) revised May and June modestly higher by a combined 2,000 jobs. May’s preliminary addition of only 138,000 jobs, revised up to a gain of 152,000 jobs last month, was back down to a final gain of 145,000 jobs this morning. June’s preliminary gain of 222,000 jobs was revised up to an increase of 231,000 jobs this morning. Excluding March’s weather-impaired final gain of only 50,000 jobs, the other six months in 2017 have averaged a solid 207,000 jobs per month.

Private payrolls solid, too It added a much better-than-expected 205,000 jobs in July, comfortably above the Bloomberg consensus of 180,000. The BLS revised May and June a tick higher by a combined 1,000 jobs. May’s preliminary gain of only 147,000 jobs, which was revised up to an increase of 159,000 jobs last month, was revised back down to a final gain of 153,000 this morning. June’s preliminary gain of 187,000 jobs was revised up to an increase of 194,000 jobs this morning. Excluding March’s paltry final gain of only 59,000 jobs (largely due to winter storm Stella), the first seven months of this year averaged a solid 195,000 jobs per month.

Government hiring inches higher As the difference between private and nonfarm payrolls, the government collectively added 4,000 federal, state and local jobs in July. This data series has been choppy, compared with a strong increase of 37,000 jobs in June, a loss of 8,000 jobs in May, a gain of 13,000 jobs in April and a loss of 9,000 jobs in March. In July, the feds did not add any jobs and states slashed 3,000 jobs, but local governments added 7,000 jobs.

Household jobs soar The admittedly volatile household survey added 345,000 jobs in July, compared with the addition of 245,000 jobs in June, after losing 233,000 positions in May. That compares with adding 156,000 jobs in April, 472,000 jobs in March and 447,000 jobs in February. The household survey is a leading indicator for nonfarm and private payrolls, so July’s strong increase is very encouraging for future additional payroll gains in August, which tends to be a quirky month. It also serves as the basis for the unemployment rate.

Unemployment rate falls, labor-impairment flat and participation rate rises The civilian labor force rose by 349,000 workers in July, a second-consecutive solid gain on the heels of an increase of 361,000 workers in June, which had reversed a sharp loss of 429,000 workers in May. As a result, the unemployment rate decreased a tick to 4.3% in July, matching its lowest level since February 2001. The labor-impairment rate (U-6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—was unchanged at 8.6% in July, marginally above May’s 8.4% (its lowest level since November 2007). But that’s still down sharply from 9.4% in January. Finally, the labor-force participation rate (the share of working-age people in the labor force) increased for the second-consecutive month to 62.9% in July, now only marginally below its 2-year high of 63% in March. The 38-year cycle low of 62.4% was set in October 2014.

Wage growth rises but hours-worked flat Hourly wages ticked up on a month-over-month basis, rising 0.3% in July. On a year-over-year basis, wage growth was unchanged at an increase of 2.5% in July, down from December’s 8-year, cycle-high gain of 2.9%. The average private workweek for all employees was unchanged in July at 34.5 hours, compared with 34.3 hours in both March and February, which had matched a 2-year low. A change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 or more jobs to or from the economy.

Construction and manufacturing both rise Manufacturing surged to a gain of 16,000 jobs in July, after an upwardly revised gain of 12,000 jobs in June (originally reported as a paltry gain of only 1,000 jobs) and a breakeven May. But that’s still down from a gain of 22,000 in February (a 3-year high). We’re still anticipating auto furloughs in August, which could negatively impact this metric next month. Construction hiring rose by 6,000 jobs in July versus a stronger gain of 15,000 jobs in June, 7,000 jobs in May and breakeven in each of April and March. But that’s still down sharply from a gain of 54,000 jobs in an unseasonably warm February, the largest gain since March 2007.

Retail treads water Retail added only 1,000 jobs in July after adding a downwardly revised 2,000 jobs in June (originally reported as a gain of 8,000). Retail had lost 10,000 jobs for the fourth consecutive month in May, preceding losses of 4,000 jobs in April, 40,000 in March and 29,000 jobs in February.

Temps strong For the seventh consecutive month, this category gained jobs: 15,000 in July, 3,000 in June, 15,000 in May, 2,000 in April, 13,000 in March, 10,000 in February and 15,000 in January. Temps are an important leading indicator of employment growth, so this trend is certainly encouraging for August.

Leisure soars This economically sensitive category added a whopping 62,000 jobs in July (its strongest showing in a year), compared with an upwardly revised 40,000 jobs in June (originally reported as a modest gain of only 6,000 jobs). That’s versus 33,000 in May and 60,000 in April. So the economy has strengthened considerably from a tepid first quarter.

Education & health care strengthen In July, these categories adding 54,000 jobs, compared with 43,000 jobs in June, 37,000 jobs in May, 45,000 in April, 16,000 in March, and a whopping 66,000 in February.

ADP revised sharply higher in June This helped ease the sting from July’s headline miss. The ADP National Employment Report, a forward-looking proxy for private payroll growth, added a solid 178,000 jobs in July, but that’s down from consensus expectations for a much stronger gain of 190,000 jobs. The big news, however, came with the significant 33,000 upward revision of June’s report to 191,000 jobs, which squares with the strong nonfarm payrolls report for June. So the labor market is chugging along. Small firms with fewer than 50 employees added 50,000 jobs in July (28% of total, compared with June’s upwardly revised 29,000, or 15% of its total); midsized companies with 50 to 500 employees added 83,000 (47%, compared with June’s upwardly revised 104,000, or 55%); and larger companies with more than 500 employees hired 45,000 (25%, compared with June’s upwardly revised 58,000, or 30%).

JOLTS slip The Job Openings and Labor Turnover Survey (JOLTS) measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends. In the most recent data available, job openings in May fell by 300,000 from April’s 5.937 million (revised downward from a record high of 6.044 million) to 5.666 million. The job openings rate declined from 3.9% to 3.7%, while the hires rate increased from 3.5% to 3.7% and the quits rate rose from 2.1% to 2.2%. It’s only one month of data, but if sustained, it could indicate a balancing in the labor market, as employers may be having more success finding people with the right skills for their open jobs.

Challenger data shows tightening labor market The jobs-cut data from Challenger, Gray & Christmas hit an 8-month low with the report of only 28,300 layoffs in July, down 9% from June and down nearly 38% from a year ago. Only three times in the last decade have monthly job cut totals been under 30,000. They also announced 88,000 new openings last month, the highest July total on record.

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