Downward revisions to the May and June estimate of total employment as well as a decline in total and aggregate hours worked cast a pall over a total change in July employment of 123,000 (164,000 top line less net downward revision of 41,000) and the unemployment rate that held steady at 3.7%.
While job gains were solid in manufacturing, goods production, business services, and education and health, the back revisions to the June and May data resulted in the top-line three-month moving average slipping to 140,000 per month, well below the 211,000 average where the economy was roughly one year ago.
Private-service hiring, which typically results in a super majority of hiring each month, added 133,000 jobs on the month; however, the three-month average has slipped to 120,000, down from 150,000 a year ago. The slowing in private-sector hiring is troubling, given that we are late in the business cycle and the “uncertainty tax” imposed by trade policy appears to be accelerating. One fears that if the trade tensions increase noticeably over the next two months, private sector hiring will decelerate at a much more notable pace.
Looking under the hood
It seems that once policymakers at the central bank lift the hood on this jobs report that the internals will trump the top line increase and tend to support those on the Federal Open Market Committee that will likely seek to push the policy rate lower to a range of 1.75% to 2% in the fall of 2019.
Modest wage growth was evident during the month, as average hourly earnings increased 0.3%, which resulted in a 3.21% gain on a year-ago basis. Because that metric is quite volatile, we prefer a smoothed three-month average annualized estimate to ascertain trend growth in wages; on that basis, wages increased to 2.82% on a year-ago basis. On a weekly basis, earnings declined -0.1% and are up 2.61% from one year ago. This data tends to suggest that wage gains for the cycle topped out in early 2019 despite increases in the lower income quintile. We think that this has to do with the lack of premium commanded by those individuals re-entering the workforce following long bouts of unemployment. While the participation rate improved to 63% and an additional 370,000 individuals entered the labor force in July, the increase in the overall labor supply increased 0.70%, below the 20-year average and just above the long term average of 0.50%.
Total hours worked declined by -0.3% in July, while aggregate hours fell of -0.2% during the month. This implies that consumers will pull back on the robust spending observed in the second quarter. Given President Trump’s tweet that he intends to impose a tax of 10% on an additional $300 billion of Chinese imports beginning next month, conditions are aligned for a challenging holiday spending season going forward. Given the quarter’s narrowing profit margins and weak corporate earnings, it is very clear that if the import taxes are imposed, the consumer for the first time in the year-old trade war will bear the burden of adjustment this fall.