John Lynch Chief Investment Strategist, LPL Financial
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The Labor Department’s July jobs report, released on Friday, August 3, confirmed that the labor market remains healthy. Nonfarm payrolls rose 157,000 in July, below consensus expectations for a 193,000 increase; however, an upward revision of 59,000 jobs for May and June more than offset the July miss and helped paint an overall picture of a healthy job market. With the revisions, job growth for May and June averaged 258,000, the strongest two-month period since July 2016. These strong summer months lifted 3-month average payroll growth to 224,333 and 1-year average payroll growth to 200,000.
Slowing job growth is expected in this stage of the economic cycle, with the economy near what is considered full employment. Late-summer job growth is also seasonally weaker as temporary summer jobs are terminated. Given those upward payroll revisions, seasonality, and the late-stage economic cycle, cooler growth in July makes sense, and the long-term trend of payroll growth looks steady
MANUFACTURING JOBS SUPPORT GROWTH
Job growth in the manufacturing sector was one of the highlights in July’s jobs report. Manufacturing jobs increased 37,000, close to a high for the cycle [Figure 2]. The jobs data support the strength we’ve seen in the manufacturing sector over the past few months, with the Institute for Supply Management’s (ISM) and Markit’s U.S. manufacturing activity gauges near economic cycle highs in June.
As the manufacturing sector continues to improve, we expect manufacturing payrolls to expand accordingly and lift overall job growth. The impact from tariffs, however, remains a risk, with some effects already starting to appear in the manufacturing reports. July’s ISM Manufacturing Index came in at 58.1, below expectations of 59.4. While 58.1 is still historically strong, it was the largest month-over-month dip in the gauge since August 2016—evidence that uncertainty around trade is impacting U.S. manufacturers.
UNDEREMPLOYMENT AT A 17-YEAR LOW
Unemployment fell slightly in July, but underemployment—which includes discouraged workers, workers marginally attached to the workforce, and those working part time for economic reasons—fell more dramatically. The headline unemployment rate fell to 3.9% in July after unexpectedly ticking up to 4.0% in June and continues to hover near its lowest level since April 2000. Given our current economic momentum, we expect the unemployment rate to continually grind down to 3.6% over the next several months.
The more interesting number to us is the underemployment rate, which fell to a 17-year low of 7.5% in July. The underemployment rate has dropped precipitously since the beginning of 2017, which is significant considering the high underemployment rate has been heralded as a source of slack in an otherwise tight labor market. The decrease in the underemployment rate is a positive sign for the U.S. economy, as it shows that companies generally expect growth to pick up enough to justify higher headcounts.
However, wage pressure should intensify as the underemployment rate continues to decline and competition for labor intensifies.