Slower Jobs Growth In July, But The Macro Trend Remains Positive

Private payrolls increased by a seasonally adjusted 161,000 in July, the Labor Department reports. That’s below expectations, but the moderately disappointing pace of growth last month isn’t out of character with the trend this year. In fact, when you consider today’s number in context with the other economic news of late, there’s still a good case for assuming that a moderate rate of expansion is still with us for the economy overall.

Let’s start with today’s private payrolls data. As the chart below shows, July’s net gain was relatively sluggish by recent standards. On the other hand, there’s a fair amount of noise in the monthly numbers, and there’s always revision risk to contend with when focusing on the latest data point. Meantime, the year-over-year percentage change in this series offers a more reliable measure of the trend, and by that standard the latest numbers fall in line with recent history. Private payrolls increased by roughly 2.1% in July vs. the year-earlier level. That’s a respectable gain and one that supports the case for thinking that the labor market continues to heal.

Speaking of healing, yesterday’s jobless claims report reveals that new filings for unemployment benefits inched lower to a new five-and-a-half-year low for the week through July 27. That’s a strong signal that suggests that the economy will continue to create new jobs at a moderate pace for the near term. The new low in claims also supports the idea that the upbeat rate of annual growth we saw in today’s payrolls report accurately reflects the primary trend in the labor market.

Yesterday also brought word that the ISM Manufacturing Index in July increased by substantially more than economists predicted, rising to a two-year high of 55.4, or well above the neutral no-growth 50.0 mark. Significantly, the new orders, production, and employment components of the ISM headline index also posted strong gains last month.
In addition, today’s personal income and spending update for June brought decent news. Disposable personal income rose again by 0.3% in June vs. May while the rate of growth in personal consumption expenditures picked up to a 0.5% increase. More importantly, both of these indicators posted another round of faster year-over-year growth, dropping hints that the slow decline in the annual trend may finally by in a positive reversal with legs.

As always, it’s premature to draw any conclusions about whether we’re seeing a material increase in the macro trend based solely on the latest numbers. But it’s also premature to argue that the latest round of data, in the aggregate, shows that the economy is weakening. True, last month’s payrolls data looks weak, but jobless claims and the ISM data offer strong counterpoints to seeing the July economic profile overall as moving in the wrong direction. Yes, it’s still early for deciding how last month fared generally. But the early data, on balance, continues to imply that moderate growth remains intact. That encourages the idea that the next monthly update of The Capital Spectator’s Economic Profile will continue to show relatively low levels of business cycle risk.