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July

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:

 

From BLS:

 

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.

US July Employment Report: A Preview

Today, the BLS will publish July Employment report and it will give more details regarding the labor market situation. The Bloomberg consensus expects nonfarm payrolls to decrease by 10K in July to 185K and unemployment rate to reach 7.5%, down from 7.6% in June.

 

My conviction is that nonfarm payrolls could be above the consensus in a context where most of proxies suggest better labor market conditions (in line with Fed comments):

 

1/ (+) During the survey period (2nd week of July), the four-week moving average of initial claims decreased from 348.5K (2nd week of June) to 346.5K.

 

2/ (-) On the same period, continuing claims rose from 2987K to 3003K.

 

3/ (+) “Employment” component (Hard to get a job minus Plentiful) of the Conference Board rose from -25.8 in June to -23.3 in July.

 

4/ (+) The ISM manufacturing employment index increased in July to 54.4 from 48.7 in June confirming the trend recorded by the regional surveys (New York, Philadelphia, Dallas…)

 

5/ (+) The ADP employment report showed an increase of 200,000 private sector payroll jobs in July up from 198K in June. Prior ADP Employment Change revised higher from +188K to +198K.

 

6/ (-) Online advertised vacancies dropped 92,200 in July to 4,888,100, according to The Conference Board Help Wanted OnLine (HWOL) Data Series just released.

 

7/ (+) Gallup’s seasonally adjusted U.S. unemployment rate for July is 7.4%, a slight decline from 7.6% in June.

 
These data sent positive signals as hirings in the manufacturng sector could rebound in July. My feeling is that the climate was again milder in July which could be a boost both for catering, leisure and also construction. Moreover, government hirings could stabilize with improving public finances. As a consequence, I expect a slight improvement in nonfarm payrolls and a number above the consensus.