Much weaker than expected – but was it really weak?
Nonfarm payrolls fell by 23,000 for July, with downward revisions over the prior two months totaling 103,000 – much less than market expectations. But private payrolls grew by 30,000 despite a 40,000 drop in the leisure and hospitality sector along with a nearly 20,000 decline in retail – both perhaps impacted by less World Cup activity than expected. Additionally, government employment dropped by a large 53,000 for the month.
The U-3 unemployment rate dipped to a very low 4.1 percent, while the broader U-6 rate (including measures of underemployment) remained at a low 7.9 percent. The civilian labor force fell by 264,000 – a negative reason for the unemployment rate to edge lower.
With the 3-month average change in nonfarm payrolls down to 20,000, the labor market has slowed (despite the drop in the unemployment rate). But is the labor market weak? We know that the labor force is being pressured by immigration policy and demographics, and the breakeven rate of nonfarm payroll changes is probably 50,000 or less. Moreover, the weekly unemployment claims are averaging a very low 200,000 and the JOLTS shows a fairly stable job market.
On balance, today’s report for July (and the downward revisions for the prior couple of months) reverses unusually strong job gains. The big drop in government employment could well be caused by seasonal factors, while as noted the declines in leisure/hospitality and retail sales could be tied to the one-time impact of the World Cup. Taken together, the job market has slowed, but to a more sustainable pace (given immigration and demographics).
What will the Federal Reserve do at the September FOMC meeting in response to the weaker July jobs report? Market expectations have changed to a 58 percent probability of no change at the next FOMC meeting. Before that meeting, there will be another employment report and all the usual inflation reports – and those will be key in determining the Fed’s next move. As a result, it is to soon to make a strong determination about Fed policy in September – especially with Chair Warsh’s hostility to forward guidance.
David W. Berson, Ph.D., CBE
Chief Economist
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