Big Surprise for the July Employment Report

US nonfarm payrolls increased by 528,000 in July, well above the consensus estimate of 250,000 and the biggest increase since February. Private payrolls showed an increase of 471,000 in July from the consensus estimate of 230,000, and the biggest increase since February (see first chart). Overall, the jobs report is a positive outcome.

Despite the strong results, the significant overweight of the latest data points to headwinds for the economy. An aggressive Fed tightening cycle, near-record low consumer sentiment, rising initial jobless claims and a weaker housing market have offset some of the positive effects of a strong July jobs report. In addition, constant disruptions to global supply chains are adding headwinds. Caution is still warranted.

Growth in recent months is still broad. Of the 471,000 private sector job gains, private services added 402,000 compared to a 12-month average of 424,200, and commodity industries added 69,000 compared to a 12-month average of 71,100.

In the private sector, education and health services increased by 122,000 (vs. 66,300 on average in twelve months), leisure and hospitality services added 96,000 (vs. 126,500), business and professional services added 89,000 (vs. 96,100), retail employment increased by 21,600 (vs. 33,900), transport and warehousing added 20,900 jobs (vs. 36,500 on average), information services increased by 13,000 (vs. 16,100), and wholesale trade increased by 10,500 (versus 16,100). vs. 14,900; see second graph).

Among the 69,000 gains in goods-producing industries, construction increased by 32,000, durable goods increased by 21,000, non-durables increased by 9,000, and mining and logging increased by 7,000 (see second chart) . While actual monthly private sector wage income is dominated by a few service industries, monthly percentage changes paint a slightly different picture. The mining and logging industries have recently posted significant monthly percentage gains (see chart three).

The average hourly wage of all private workers rose by 0.5 percent in July, resulting in a 12-month increase of 5.2 percent, which is roughly stable since October 2021 (see chart four). Average hourly wages for private, manufacturing and non-supervisory workers rose 0.4% MoM and rose 6.2% year-over-year, also roughly in line with the past ten months (see graph four). The average workweek for all workers remained unchanged in July at 34.6 hours, while the average workweek for production and non-supervisory workers was 34.0 hours.

Combining wage bills with hourly wages and hours worked, the total weekly wage index for all workers rose 0.9 percent in July and 9.7 percent year-over-year; the index for production and non-supervisory workers rose by 0.8 percent and is 10.3 percent higher than last year. The total number of officially unemployed in July was 5.670 million, down 242,000. The unemployment rate fell to 3.5 percent from 3.6 percent in June, while the underemployment rate, called the U-6 rate, remained unchanged at 6.7 percent in July.

The employment-to-population ratio, one of the roughly matching AIERs, was 60.0 percent in July, up 0.1 percentage point but still well below February 2020’s 61.2 percent.

Labor force participation fell again, falling 0.1 percentage points in July to 62.1 percent. This important figure has been on a downward trend in recent months after hitting a pandemic high of 62.4 percent in March 2022 and still well below the 63.4 percent in February 2020 (see chart five).

The total labor force was 164.0 million, down 63,000 from the previous month and 623,000 below the February 2020 level of 164.6 million (see Chart 5). If the participation rate of 63.4 percent were applied to the current population, an additional 3.4 million workers would be available.

The weaker participation rate is one of the reasons why the labor market remains so tight. According to the latest Jobs and Turnover Survey (JOLTS), there are 1,092 available workers for every job, up from April’s record low of 0.957 (see chart six). The latest study of vacancies and turnover by the Bureau of Labor Statistics shows that the total number of vacancies in the economy fell to 10.698 million in June from 11.303 million in May; openings were a record 11.855 million in March.

The number of open positions in the private sector decreased to 9.766 million in June compared to 10.275 million in May and a record 10.812 million in March. June was also the first month below 10 million since November 2021 and the lowest since September 2021.

The July Jobs Report shows that total non-farm and private sector jobs posted surprisingly strong growth. However, the upward trend in weekly initial jobless claims and the continued decline in job openings and layoffs in June suggest that some of the positive results from the July jobs report are being offset.

The ever-increasing rates of price growth are affecting consumer attitudes and may also begin to influence spending patterns. In addition, the intensifying cycle of Fed tightening increases the cost of borrowing for both consumers and businesses. At the same time, the consequences of the Russian invasion of Ukraine continue to disrupt global supply chains. The outlook remains highly uncertain, and caution is warranted.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 after over 25 years of economic and financial market research on Wall Street. Bob previously led the Global Equity Strategy division of Brown Brothers Harriman, where he developed an equity investment strategy that combines macro downside analysis with upside fundamentals.

Prior to joining BBH, Bob was Senior Equity Strategist at State Street Global Markets, Senior Economic Strategist at Prudential Equity Group, and Senior Economist and Financial Markets Analyst at Citicorp Investment Services. Bob holds an MA in Economics from Fordham University and a BA in Business from Lehigh University.

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