Orlando's Outlook: Geoffrey the giraffe hijacks jobs report

08-03-2018

Bottom line This morning’s payroll report for July disappointed on the surface. A meager gain of only 157,000 nonfarm jobs added was well below consensus expectations for a healthy gain of 193,000 and our own more aggressive forecast of 218,000. But much can be traced to the Toys “R” Us bankruptcy. At the end of June, the chain closed its remaining 200 stores (down from 735 stores in March), taking 32,000 jobs out of retail. The Labor Department also revised May and June sharply higher by 59,000 jobs in total. So adjusted, July’s payroll gain actually approximated 248,000 jobs.

Other highlights in July included surges in household employment, manufacturing and temporary help, a decline in both the unemployment rate (U-3) and the labor impairment rate (U-6) to 3.9% and 7.5%, respectively, and an absence of wage inflation. On balance, then, today’s actually strong jobs report for July should keep the Federal Reserve on pace for its planned rate hike in September, regardless of the risk of a wonky payroll report in August.

Strong claims and ADP The July numbers for each foretold solid payroll data this morning. Initial weekly unemployment claims for the survey week ended July 14 fell to 208,000, a 49-year cycle low. ADP added a stronger-than-expected 219,000 private jobs in July (consensus at 186,000), a 5-month high. In addition, 78% of ADP’s jobs in July came from small- and mid-sized companies versus only 61% in June—a bullish improvement.

Nonfarm payroll flash disappoints The gain of only 157,000 jobs in July was well below the Bloomberg consensus of 193,000 and Federated’s estimate of 218,000. But the Bureau of Labor Statistics (BLS) revised May and June higher by a combined 59,000 jobs. May was revised up, from a preliminary gain of 223,000 jobs, to a revised increase of 244,000 jobs last month, to a robust final gain of 268,000 this morning. June was also revised higher, from a preliminary increase of 213,000 last month, to a revised gain of 248,000 this morning. So, despite July’s disappointing flash, nonfarm payrolls have posted a healthy average gain of 224,000 jobs over the past three months.

Government hiring falls This category actually lost 13,000 jobs in July, paced by a decline of 20,000 at the local level, which means that private payroll gains (170,000 jobs) actually outstripped the nonfarm increase of 157,000.

Household survey rebounds The admittedly volatile household survey surged by 389,000 jobs in July, a sharp rebound over June’s moderate gain of 102,000. July even surpassed May’s strong gain of 293,000, which was much better than the tepid gain of only 3,000 in April and a loss of 37,000 due to the snow storms in March. This leading indicator for nonfarm and private payrolls serves as the basis for the unemployment rate.

Unemployment and labor-impairment rates decline; participation rate flat The civilian labor force grew by 105,000 people in July, down from a powerful increase of 601,000 in June. That kept the labor-force-participation rate (the share of working-age people in the labor force) flat at 62.9% in July, just below a five-month high of 63% in February, but above a 41-year low of 62.3% set in September 2015. With an increase of 389,000 in the household survey, the number of unemployed actually declined by 284,000. That drove the unemployment rate down a tick to 3.9% in July from 4% in June, but slightly higher than May’s 49-year low of 3.8%. The labor-impairment rate—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—plunged to 7.5% in July from 7.8% in June. The July mark is a 17-year low.

Flat wage growth; hours worked declines Average hourly earnings rose 0.3% on a month-to-month (m/m) basis in July, up from a downwardly revised gain of 0.1% June. That translates into a flat year-over-year (y/y) gain of 2.7%. For the fifth time in the past six months, the average private work week for all employees was at 34.5 hours in July, down a tick from June’s upwardly revised 34.6 hours. Each additional 0.1 hour worked theoretically adds 350,000 jobs to the economy.

Manufacturing strong again, and construction improves The manufacturing sector continues to accelerate, adding a much stronger-than-expected 37,000 jobs in July versus 33,000 jobs in June and 23,000 in May. Housing remains disappointing this summer, with construction adding only 19,000 jobs in July, versus 13,000 in June, 30,000 in May and the robust addition of 67,000 in a warm February.

Temps strong, retail soft Temporary help (a leading economic indicator) enjoyed a powerful month, adding 28,000 jobs in July compared with losses of 8,000 jobs in June and 1,000 in May. The Toys “R” Us’ closure hurt retail, which added only 7,000 jobs in July versus a loss of 20,000 in June. We’re expecting a solid “Back-to-School” season this summer, so job gains may improve over the next few months.

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