July was yet another solid month for the U.S. job market, with a healthy 209K net new jobs adding to an upwardly revised 231K gain in June. Revisions to the previous two months of payrolls added 2k positions.
Private payrolls rose by 205k, led by gains in food services and drinking places (+53K), professional and business services (+49K) and health care (+39K). Overall services sector hiring (+183K) accelerated in July, while the goods sector downshifted slightly (+22K), on slower gains in construction (+6k).
In the household survey, July job growth (+345K) outpaced a 349K gain in the labor force, taking the unemployment rate down slightly to 4.3%. More encouraging was an uptick in the participation rate to 62.9% from 62.8% in June. Broader measures of underemployment, such as the U-6 rate remained unchanged.
Wages perked up a bit in July, with a solid 0.3% gain in average hourly earnings. That left year-on-year wage inflation steady at 2.5% in July.
Key Implications
Once again job gains beat expectations. Job growth moderated only slightly from June to July, and the average over the past six months held steady around 180K. At this stage of the business cycle we would have expected job growth to have slowed further, so the durability of employment gains is impressive. That said, we still to expect monthly job gains to moderate in the coming months, as tight labor markets make new hires tougher to find (see our recent quarterly forecast). Unemployment is at a cycle low of 4.3%, and alternative measures of labor underutilization are also approaching pre-recession lows. That suggests that American workers are likely to get healthier raises in the months ahead.
As far as its full-employment mandate is concerned, the Fed is well justified in gradually removing monetary stimulus. It is the recent softness in inflation that has caused some consternation by FOMC members (see FOMC commentary). While the relationship between labor market tightness and inflation has weakened in recent years (see Dollars & Sense) it still exists, and inflation should pick up in the coming months, providing reassurance for the Fed.
The wild card now is Washington. By the end of September Congress needs to raise both the debt ceiling and pass stopgap funding legislation to prevent a government shutdown in October. If this process proves messy, it could roil financial markets, and potentially stay the Fed’s hand from shrinking its balance sheet next month.
