KEY DATA: Payrolls: 255,000; Private: 217,000; Unemployment Rate: 4.9% (Unchanged); Wages: +0.3%/ Trade Deficit: $44.5 billion ($3.6 billion wider)
IN A NUTSHELL: “Dear Fed: Wake up and smell the job growth.”
WHAT IT MEANS: Maybe it’s not morning in America, but the coffee is brewing and jobs are being created. After one poor employment report, the consensus was that the economy had stalled. I said at the time: “Take a deep breath, breathe slowly and don’t panic”. I hope you did because businesses are adding lots of new workers. The July payroll increase was not only well above expectations, but it was strong across the board. No major sector posted a decline. Almost 64% of the industries added workers, a very high percentage. Over 54% of the manufacturing industries, the economy’s weak link, added employees. Construction companies and temp help agencies were up solidly and retailers are bringing on workers to meet the strong demand. Even the government is back in the hiring business after cutting back for so long. Wage gains were strong. The labor force and participation rate increased. Even the flat unemployment rate is understandable given the surge in the number of people looking for work. Good paying jobs, mediocre paying jobs and low paying jobs all were up. In other words, there was almost no weakness in this report, which is largely unheard of.
The trade deficit widened in June as imports rose faster than exports. That shouldn’t surprise anyone since the U.S. economy is still the best industrialized one in the world. Of course, given the huge jobs numbers, this number is a tree that fell in the forest. It was nice to see that we continue to sell more goods overseas and there were increases in consumer and capital goods and agricultural products. On the import side, demand for foreign consumer and capital goods was also strong.
MARKETS AND FED POLICY IMPLICATIONS: I noted yesterday that even if the jobs report were much stronger than expected, the Fed would not take the bait. The report was much stronger than anyone forecast but all it is likely to do is get the Fed to focus on something else, such as wage gains or economic growth. On the wage side, there is a clear increase in gains but it is not yet threatening. So, Fed Chair Yellen can continue to claim the market still has some slack. Given the rise in the participation rate, that might be true, but there is not a whole lot of slack left. Also, job growth is likely to settle down into a 175,000 to 200,000 range over the remainder of the year, which will look a lot softer than the past two month average of nearly 275,000. I am sure some political wag will claim job growth is faltering, but that level is about as good as we can expect given the low supply of available labor – the unemployed and discouraged workers. It is also strong enough for the unemployment rate to fall every few months. So, while the economy is strong enough to absorb modest 0.25% rate hikes in both September and December, this Fed does not seem to be inclined to do that. But we should expect to see the members begin the softening of the beaches process and it is best to assume that at we will get at least one rate hike this year.