Why the mediocre U.S. July jobs report was worse than it looked
U.S. economists were generally disappointed with the net gain of 162,000 jobs last month, well below forecasts around 180,000 and market talk of a possible reading above 200,000. The jobless rate did fall to 7.4 percent from 7.6 percent, but labor force participation also resumed its recent descent.
Thomas Lam, chief G3 economist at OSK-DMG/RHB, says the underlying details of the report make employment conditions actually look worse than at first glance. Here’s why:
The most striking aspect of the Jul employment report is that details of the release appear generally weaker than the uninspiring headlines figures. The nonfarm payrolls print of 162k in Jul, while modestly softer than expectations, was accompanied by narrower gains in private payrolls (the weakest 1-month and 3-month diffusion data since Aug & Sep 2012), and net downward revisions of 26k in prior months (-19k in May and -7k in Jun, confined within private employment). Moreover, the employment and workweek details from the Jul release imply that real GDP growth in early Q3 2013 might be tracking weaker than the advance Q2 2013 print of 1.7%.
Our proprietary leading indicator of payrolls, the Forward-Looking Indicator of Payrolls (or FLIP), which foreshadowed a weaker trend in private payroll growth recently, continues to signal downside risks to private employment growth in the pipeline. Similarly, our calculations also suggest that private job growth within the more cyclically-sensitive sectors slowed markedly in Jul to only 9k from roughly 60k in the prior two months (with the 3-month run-rate trending lower). Essentially, the foregoing decomposition suggests that private employment growth has probably been driven by counter-cyclical and less-cyclical industries over the last two months.
Separately, however, some took solace in the larger than expected decline in the headline unemployment rate – from the household survey – to 7.4% in Jul. But the lower quality improvement in unemployment should raise some questions. Our calculations suggest that around 60% of the 0.2%-point drop in unemployment was due to lower labor force participation (a stable participation rate would have led to a 7.5% unemployment rate in Jul), and the remainder resulting from higher employment. But the gains in household employment in Jul probably emanated from the more fickle part-time category, which was almost twice as much as full-time hiring. And early hints from available labor market indicators, based on our estimates, imply that the unemployment rate could potentially tick back up in the near-term.