July payroll employment growth came in better than expected, at 163,000, the strongest month since February, although the unemployment rate edged up to 8.3%.
Finally, we have some good news on the employment front, as payrolls rose 163,000 in July, almost 100,000 better than June, and the best month since February. The better-than-expected report will alleviate fears that the United States might be slipping back into recession. The report does not change the big picture—the recovery remains very sluggish—and on its own won’t dissuade the Fed from injecting more stimulus next month.
The big improvements were in private education (which was unusually weak in June), leisure and hospitality, and manufacturing. Manufacturing was helped by fewer seasonal auto shutdowns than anticipated, so the good news there may prove temporary.
The news on unemployment did not match the improvement in payrolls. The unemployment rate was fractionally higher, but by just enough that the politically sensitive headline rate now rounds up to 8.3% instead of rounding down to 8.2%. In the household survey, which produces the unemployment rate, both the employment-to-population ratio and the labor-force participation rate dropped, not signs of a healthy labor market.
In the payroll details, manufacturing added 25,000 jobs, almost all of them in durable goods. The biggest gain (13,000) was in motor vehicles and parts, where there were fewer summer shutdowns than normal. Overall manufacturing production-worker hours rose 0.4%, a good sign for manufacturing output growth in July. The manufacturing workweek was steady, although overtime was slightly lower than in June.
Construction did not contribute to the jobs improvement. It lost 1,000 jobs, with residential and heavy and civil engineering both up, but nonresidential construction down.
Private services employment growth was 148,000, much better than May's 60,000. The biggest swing was in private education services, which unusually lost 15,000 jobs in June, but regained 18,000 jobs in July. The other sector doing much better was food services and drinking places, which added 29,000 jobs, much better than the 9,000 jobs added in June. Healthcare services added only 12,000 jobs, the same as in June, but less than half its "normal" pace.
Professional and business services did well, like in June (up 49,000 jobs, after a 44,000 gain), as professional and technical jobs rose 18,000 (after rising 15,000). Temporary help jobs rose 14,000, down from 21,000 in June, meaning that the improvement in job creation was all in permanent jobs.
The government sector shed 9,000 jobs, the same loss as in June. Federal employment fell 2,000. State and local government employment dropped 7,000, with state employment down 6,000 and local government employment down 1,000.
The private workweek held steady at 34.5 hours, after rising in June. As a result, even though private employment rose faster than in June, total hours worked rose only 0.1%, down from a 0.4% rate of increase in June. For the second quarter overall, hours were up only 0.4%, but the momentum from June's sharp increase means that third-quarter hours growth should be stronger than that.
Average hourly earnings were up a modest 0.1% month on month (m/m) and 1.7% year on year (y/y), after a stronger 0.3% m/m increase in June. Wage increases are roughly in line with the CPI inflation rate (which was 1.7% y/y in June). Overall payrolls (wages multiplied by hours) rose a modest 0.2% m/m, implying subdued growth in household incomes during July.
The unemployment rate edged up to 8.3%, from 8.2% (before rounding, it rose to 8.254% from 8.217%). Household employment fell 195,000, while the labor force shrank 150,000. The labor-force participation rate (the proportion of the adult population in the labor force) edged down to 63.7%, from 63.8%. The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—rose to 15.0%, from 14.9%. The proportion of long-term unemployed (27 weeks or longer) dropped to 40.7%, from 41.9%. This might mean that some of the long-term unemployed found jobs—but more likely, since employment and the labor force both fell in the household survey, some of the long-term unemployed left the labor force. The longer that potential workers remain unemployed, the less likely that they will ever get back into employment.
The July employment report will alleviate fears that the United States might be tipping back into recession. The July improvement in payrolls suggests that employment growth undershot in the second quarter (73,000 average) after a very strong first quarter (226,000 average), partly due to weather impacts. But uncertainties over the strength of global growth, the Eurozone crisis, the fiscal cliff, and the November elections are giving plenty of reasons for caution. We expect subdued monthly job creation in the 100,000–150,000 range during the second half of the year.
We do not believe that this report on its own is strong enough to dissuade the Federal Reserve from introducing a new quantitative easing program (QE3) at its next meeting (September 13). But it does raise the importance of the next employment report (due September 7). If that is sufficiently strong (better again than this month's report), the Fed might decide to wait and see rather than take action. But our baseline case remains that the Fed will introduce a QE3 program in September focused upon purchases of mortgage-backed securities, with the aim of pressing down on home mortgage rates.