Soft underbelly to firmer July jobs report

August 3, 2012

After a string of very weak figures in the second quarter, the July employment figures prompted a collective sigh of relief that the U.S. economy was at least not sinking into recession. That doesn’t mean the news was particularly comforting. U.S. employers created a net 163,000 new jobs last month, far above the Reuters poll consensus of 100,000. Still, the jobless rate rose to 8.3 percent.

Steve Blitz of ITG Investment Research explains why the underlying components of the payrolls survey offered little cause for enthusiasm:

The headline is good but the details do nothing to dissuade the notion that economic activity remains soft. There is, in effect, no sign in the details economic activity has accelerated from June’s pace when a downward revised 73,000 private sector jobs were added. Hours worked remain the same and overtime at manufacturing firms fell. The diffusion index (percentage of firms adding workers plus one-half of the percentage with unchanged payrolls) dropped in July to 56.4 from 56.8 in June, 61.3 in May, and 62.2 in July of last year. The civilian labor force dropped by 150,000 and the broad U-6 measure of unemployment rose to 15.0% — reversing all the gains made in 2012.

Given this backdrop and looking at the jobs gains in various categories it is difficult to see how similar upticks are likely to be repeated in August. […]

In sum, if one wants to take from this report the notion that the economy isn’t heading into a contraction or something worse, that’s fine. One would, however, be on less solid ground believing this report signaled a turn in the economy from its low level stasis of 2% real growth.

Where does this leave the Fed? Michelle Meyer, senior U.S. economist at Bank of America-Merrill Lynch:

While (the number) was notably better than expected, the guts of the report were soft. The unemployment rate edged higher to 8.3% as a drop in the labor force was more than offset by a decline in household employment. In addition, the work week was unchanged and wage growth was sluggish. We continue to expect growth to slow in the second half of the year as the uncertainty shock from the fiscal cliff weighs on corporate investment. This should ultimately trigger additional Fed easing, in our view. That said, today’s report may have bought the Fed some time.

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