Jobs: July's Stunning Disappointment


By Michael Englund and Rick MacDonald The U.S. jobs machine, which was supposed to shift into a higher gear in July, continued to sputter instead. The employment report for the month, released on Aug. 6, showed a rise in nonfarm payrolls of only 32,000 -- well below economists' median forecast of 225,000 and Action Economics' own projection of 200,000. And the weakness in the report was underscored by downward revisions to data for May and June. Overall, the data support the view that job growth for the year peaked from March through May.

As was the case in June, job growth in July fell considerably short of expectations and was way behind the swift pace seen in March, April, and May. Weakness was widespread. Manufacturing and construction added jobs at a much reduced pace relative to earlier in the year, while the retail trade, information, and financial sectors all revealed job attrition. Government jobs were flat.

ANOTHER YARDSTICK. Elsewhere in the July report, the unemployment rate fell to 5.5% (the median estimate was 5.6%) from 5.6% -- boosted by a hefty 629,000 gain in the household survey's measure of employment. The workweek rebounded to a lower-than-expected 33.7 hours (median expectation was 33.8) from 33.6 hours in June. This signals surprising restraint in total hours worked, given the strength evident in most other economic reports for July. The two-month pattern suggests that workweek growth remains subdued relative to a normal expansion.

Hourly earnings, another key component of the report, jumped 0.3% (median expectation was 0.3%). The data implies that total hours worked in the third quarter may match the 2.2% growth rate in the second. That would support our estimate for third-quarter gross domestic product growth of 4.5% and healthy gains in other monthly reports, but with less potential for upside.

Interestingly, the household survey continued to reveal substantially greater strength than the payrolls survey, with a hefty gain in the July job count of 629,000, following a 259,000 increase in June. This strength has been accompanied by a solid bounceback in labor-force growth and accommodates the downtick in the unemployment rate to 5.5%.

The payroll news caused the bond market to take at least a one-quarter point Fed rate hike out of the equation. The 10-year yield collapsed from the 4.39% area straight down to 4.16% before stabilizing. The dollar sustained heavy losses vs. other major currencies, while stocks plunged.

LOW-BALL BET. How will Federal Reserve policymakers receive the weaker than expected July jobs report? It shouldn't impact the Fed's rate decision at its scheduled Aug. 10 policy meeting, and a quarter-point tightening is still the most likely outcome.

However, all bets are off for the Sept. 21 Federal Open Market Committee meeting and those beyond. In fact, Fed funds futures, a trading vehicle for market pros to bet on future interest-rate moves, suggest tightening for the benchmark rate of only another 27 basis points more, down almost 20 basis points from the level on Aug. 5. The tone of the FOMC's statement on Aug. 10 will be key, and the markets will be looking for any signal from Alan Greenspan & Co. that the Fed is concerned that the soft patch in the economy is no longer temporary. Englund is chief economist and MacDonald is director of investment research and analysis, for Action Economics


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