Employment Report Shows that Labor Market Conditions Have Only Improved Slightly in July
According to the Bureau of Statistics, total nonfarm payrolls increased by 162,000 in July (below expectations), and the unemployment rate fell 0.2% to 7.4% against 7.5%e. The average workweek for all employees on private nonfarm payrolls dropped to 34.4 hours in July while average hourly earning decreased 0.1% MoM:
Total nonfarm payroll employment increased by 162,000 in July, with gains in retail trade, food services and drinking places, financial activities, and wholesale trade.
The change in total nonfarm payroll employment for May was revised from +195,000 to +176,000, and the change for June was revised from +195,000 to +188,000. With these revisions, employment gains in May and June combined were 26,000 less than previously reported.
Both the number of unemployed persons, at 11.5 million, and the unemployment rate, at 7.4 percent, edged down in July.
The average workweek for all employees on private nonfarm payrolls decreased by 0.1 hour in July to 34.4 hours.
In July, average hourly earnings for all employees on private nonfarm payrolls edged down by 2 cents to $23.98, following a 10-cent increase in June.
In July, the number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 4.2 million.
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 8.2 million in July.
I – My view:
1/ Nonfarm payroll figures were below expectations such as average hourly earnings and average weekly hours worked suggesting that incomes and consumption spending will only progress slightly in July.
2/ Moreover, the decrease of wages associated with the drop of the “Price Paid” component of the ISM manufacturing show that inflation could slow in the coming months confirming the recent Fed remark.
3/ The short term momentum of NFPs is still below the threshold of 200K which is not a minimum acceptable for Fed:
-> Moving average 3 months: 181K
-> Moving average 4 months: 183K
-> Moving average 5 months: 177K
-> Moving average 6 months: 201K
4/ Concerning qualitative indicators, even if the number of unemployed people decreased (-263K), the number of persons employed part time for economic reasons and long-term unemployed (those jobless for 27 weeks or more) were little changed. Besides, the fall of unemployment is also explained by a new decrease of participation rate (-0.1% to 63.4%).
II – Implications on Fed:
Even if labor market conditions are improving slightly, we are far away from Fed’s targets. Most of qualitative indicators were little changed in July and the fall of unemployment rate could be reversed next month with a rise of participation rate.
Based on the report, we could only expect a small improvement concerning incomes and consumption spending which is coherent with the drop of new auto sales (-1.8% MoM) in July. Industrial production should stagnate because even if NFP rebounded in the manufacturing sector (+6K), weekly hours worked decreased from 40.8h to 40.6h.
Finally, the decrease in wages suggests that inflation pressures are easing.
Therefore, my conviction remains that consensus view of “tapering” in September is not realistic in a context where fiscal uncertainty will remain in Q3 until lawmakers find an agreement on “continuing resolution” and 2014 budget.