United States: July jobs report underlines labor market resilience despite weaker payroll gains
The July jobs report signaled the labor market remained solid in July, as reflected by the rising labor force participation and accelerating wage growth, although non-farm payrolls gains slowed. Non-farm payrolls increased 164,000 in July, surpassing expectations of 151,000, although this still fell short of June’s downwardly revised 193,000 (previously reported: +224,000). Despite a decent headline print, downward revisions to previous estimates subtracted 41,000 jobs, while the three-month average payroll gains fell to 140,000 in July, which marked a near two-year low, but nonetheless remained comfortably above the 100,000 needed to absorb new entrants in the workforce.
There was solid payroll growth in both the services and goods-producing sectors in July. Job creation picked up in health and education services, as well as in financial activities, while professional and business services continued to post strong gains, underlining the strength of the domestic economy. However, retailers continued to shed jobs in July, albeit at a softer rate than in June, while information services also cut payrolls in the month. Turning to the industrial sector, job growth was primarily boosted by manufacturing payrolls which climbed even higher in July notwithstanding signs of a manufacturing slowdown in recent months. On the other hand, construction payrolls gains slowed notably. Meanwhile, a strong increase in government sector jobs also boosted July’s payroll figure.
The unemployment rate held steady at 3.7% in July, which confounded market expectations that it would fall to 3.6%. However, this was due to the increase in the labor force participation rate from 62.9% to 63.0%, bringing the total labor market to a record high of 163.4 million workers. Meanwhile, earnings strengthened in the month, but remained moderate overall, with hourly earnings increasing 0.3% month-on-month, matching June’s revised print, while annual wage growth ticked up to 3.2% in July from 3.1%, overshooting analysts’ expectations of 3.1% growth.
All told, July’s print underlined the resilience of the domestic economy, as accelerating wage growth signals private consumption should remain healthy in the third quarter. This comes despite intensifying headwinds from the U.S.-China trade spat, which escalated on 1 August when President Trump announced additional 10% tariffs on the remaining USD 300 billion of Chinese imported goods. Regarding its impact for future Fed moves, the goldilocks report left FocusEconomics panelists divided over the likelihood of another rate cut in September.
Economists at Goldman Sachs felt the report confirmed another cut, noting:
“Given the mixed report, we left our subjective odds of a September rate cut unchanged at 80% (we see a 70% chance of a 25bp cut, a 10% chance of a 50bp cut, and a 20% chance of no policy change). We also continue to see a 90% chance of at least one cut at some point later this year.”
Conversely, Rhys Herbert, senior economist at Lloyds Bank, viewed July’s employment figures as too strong to necessarily justify further easing, explaining:
“Overall this is a solid report suggesting that the US economy remains in good shape. Moreover, the acceleration in wage growth is an indication that the tight labour market is helping fuel some pickup in wages. So overall the report does not suggest that another US rate cut is required to follow up on Wednesday’s 25 basis points reduction. Despite that the report has had no immediate impact on market expectations, which suggest that another rate cut in September is now viewed as a near certainty.”