Private Payrolls Rebound In July

Nonfarm private payrolls rose 172,000 last month on a seasonally adjusted basis, the Labor Department reports. That’s substantially higher than the roughly 100,000 gain predicted by the consensus forecast among economists. Today’s number is also a respectable improvement over June’s revised increase of 73,000. The better-than-expected result for July isn’t a complete surprise, however, given the hints in Wednesday’s ADP Employment Report. Surprising or not, today’s employment report offers another data point for arguing that the economy isn’t falling off a cliff into a new recession.

Obsessing over the month-to-month changes in the payrolls report—or any other economic indicator—is subject to lots of statistical noise and so we should take these numbers with a grain of salt. A more robust reading on the payrolls trend comes from monitoring the year-over-year percentage change. The good news is that the annual pace of jobs growth is holding its ground at just under 1.8% (black line in chart below). That’s down a bit from the 2.1% increases logged in January and February, but it’s no trivial matter that the year-over-year rate remains near a six-year high.

There’s been some discussion in the blogosphere lately about the limitations of the government’s payrolls figures due to the distorting effects of the seasonal adjustments. This is one more reason why looking at year-over-year changes is essential. Even if we review the raw payrolls numbers—i.e., before seasonal adjustments—the year-over-year percentage change still looks encouraging as of last month: rising nearly 1.8% vs. the year-earlier level.
In fact, the weekly jobless claims data have been telling us that the labor market wasn’t buckling. The year-over-year change in unadjusted claims figures has been falling by roughly 10% for most of its recent history. That’s another signal for thinking that the labor market, for all its woes, has yet to exhibit clear and pervasive signs of tanking.

As crucial as the labor market is for evaluating the business cycle, it’s still not enough. But a broader read on the economy, and one that focuses primarily on year-over-year changes, also tells us that recession risk was low as of June, the last full month of published data. The limited set of July numbers in hand is a mixed bag so far. Yesterday’s ISM Manufacturing Index delivered another mildly weak reading, for instance. But today’s employment report for July suggests we should reserve judgment for expecting the worst.
In short, the U.S. economy continues to grow, albeit slowly and well below the levels that are needed to bring down the still-elevated unemployment rate, which actually ticked up to 8.3% last month. But based on a broad reading of the numbers in hand, the case for seeing a recession as an imminent threat remains minimal.
What might change that outlook? An explosion in the euro crisis could send recessionary shock waves across the Atlantic. Ditto for a new flare-up of troubles in the Middle East that sends oil prices skyrocketing. A further weakening in China’s already softening economy could bring trouble too. And let’s not forget the home-grown menace known as the fiscal cliff as a potential economic spoiler.
There are no shortage of potential shocks that could kill the fragile expansion in the U.S. But for the moment, the published numbers overall still inspire modest optimism that sluggish growth is the path of least resistance.