A Strong July Jobs Report, With a Few Exceptions

By Robert Hughes

Payrolls in the United States rose by 209,000 in July, the second monthly gain above 200,000 in a row. Most, but not all, of the information in the July report was positive and provides evidence for a continuing economic expansion.

First, the good news. The 209,000-job gain follows a 231,000-job increase in June and 145,000-job increase in May. Over the past three months, payrolls have risen an average of 195,000, a very positive result. Private sector payrolls added 205,000 in July following increases of 194,000 in June and 153,000 in May. For the private sector, the three-month average increase comes in at a healthy 184,000. Gains were widespread among the private sector industries, with two notable exceptions. Among the gainers, manufacturing industries added 16,000 jobs for the month compared to a 12-month average gain of just 6,000. Private services industries continue to lead in jobs creation, adding 183,000 jobs in July. Among the individual industries, leisure and hospitality added 62,000 jobs for the month and a total of 346,000 over the past year; professional- and business-services payrolls rose by 49,000 last month and have added 580,000 workers over the past year; and health care added 45,000 employees in July, bringing the 12-month total to 430,000.

The strong pace of job creation attracted 349,000 more people into the labor force in July and a total of 1.2 million in the past year. Those new entrants have pushed the labor-force participation rate up to 62.9 percent, up from the post-recession low of 62.4 percent in September 2015 but still well below both the 66 percent rate just prior to the last recession and the all-time peak of 67.3 in the first quarter of 2000. Despite the added people in the labor force, the unemployment rate fell to 4.3 percent in July, matching the low for the current expansion and below the 4.4 percent low of the prior expansion.

Average hourly earnings rose 0.3 percent in July, maintaining the 12-month change at 2.5 percent.  The length of the average workweek also held steady at 34.5 hours.  Combined, the gains in payrolls, the hours worked, and the mild gain in hourly earnings resulted in a 4.5 percent increase in the aggregate payrolls index, a proxy for take-home pay. This index has been growing in the 4 to 4.5 percent range for most of 2011–17, which provides a solid base to support consumer spending.

While a 2.5 percent gain in hourly earnings is mild by historical standards, it is not as bad when measured in real terms.  Since 1965, the average annual growth rate in real average hourly earnings has been just 0.26 percent.  Since 2000, the rate has averaged 0.64 percent.  Over the past 12 months, real hourly earnings are up 0.65 percent through May. Certainly, stronger wage growth would provide even more support for spending, but the current pace of wage growth in a relatively stable price environment is not as bad as some claim.

The weak points in the report are industry-specific. The retail industry and the information services industry added just 1,000 and 4,000 jobs in July, respectively. Even worse, over the past year, retail has lost a total of 7,000 jobs while information industries have lost 48,000 jobs. Both industries are in the midst of competitive disruption and restructuring.  The positive side of disruption is that it often creates new opportunities and makes the economy stronger and more efficient in the long run.

Overall, the employment report is quite favorable. The labor market remains the cornerstone of the current expansion and is boosting household incomes as well as consumer confidence and suggests a positive outlook for the current expansion.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.