Headline: U.S. employers added 209,000 jobs in July, which was above the consensus forecast of 180,000 jobs. Revisions to the May and June reports resulted in a net gain of 2,000 jobs. Job gains have averaged 195,000 for the past three months and 180,000 over the trailing 12 months. The unemployment rate was unchanged in July at 4.3%, and the labor force participation rate rose slightly to 62.9% from 62.8%.
Executive Summary: The economy continues to add jobs at a healthy pace and remains in good shape, but the annual rate of job growth may be slowing slightly. The economy has added 184,000 jobs per month so far in 2017, compared with 187,000 per month for all of 2016. Despite the tight labor market, wage growth has not accelerated, which is a bit surprising. Wages grew by 2.5% in July—the same rate it has been for most of the past year.
Fed Watch: The Fed’s outlook and expected path should not be impacted by this report. GDP growth is still on track to reach between 2% and 2.25% this year. The bigger concern for the Fed is inflation. The most recent inflation numbers have been falling below the Fed’s 2.0% target. We still expect the Fed to raise the federal funds rate once more in 2017, although futures markets have been lowering that probability recently. The more important factor is that the Fed has signaled that it will unwind its balance sheet soon, likely beginning in September. This will impact the long end of the yield curve much more than the federal funds rate. To date, the Fed’s actions have had minimal impact on the long end of the curve, and yields have flattened over the past four months.
Labor Force Participation: The labor force participation rate increased slightly to 62.9%. While the monthly number is volatile, it has remained between 62.4% and 63.0% since August 2013. Such stability is encouraging given that the aging workforce is a headwind to increased participation, but without a significant increase in labor availability the pace of hiring will be limited.
Wage Inflation: This is the most disappointing aspect of an otherwise healthy report. Average hourly earnings of private nonfarm payrolls increased by 9 cents to $26.36. Over the past year, wages grew 2.5%. This is above the rate of inflation—1.6% annually as of July—but below expectations given the tight labor market.
Job Growth Outlook: The tight labor market is starting to impact the pace of new hiring. The trailing 12-month job growth number a year ago was 205,000, compared with the current 180,000 average. Year-to-date, the pace of hiring is 184,00 per month, compared with 187,000 a month for all of 2016. We expect the pace of new hiring to slow as the number of available workers to pull into the labor force or those looking to transition from part-time to full-time shrinks. The Wall Street Journal poll of economists also forecasts a slowdown in future job growth.
Retail: Employers added 9,000 retail jobs in July—a second consecutive month of growth. The biggest gains were in auto and non-store retail. The leisure & hospitality sector added 62,000 jobs in July, including 53,000 in food & drinking places. Apparel employment dropped by 10,000 and is down by more 17,000 compared with last year, likely due to the impact of internet sales.
Industrial: Preliminary figures indicate that growth in transportation & warehousing employment remained positive, but warehousing & storage employment actually fell in July. Because this is a relatively small employment sector, absolute job numbers do not reflect the huge space absorption numbers we’ve seen recorded in the industrial & logistics sector.
Office: Professional & business services added 49,000 jobs in July and have added almost 600,000 jobs in the past year. That is down slightly from July’s year-over-year number, but still very healthy. Financial activities added 6,000 jobs in July, and are up 148,000 in the past year. In contrast, information has lost 48,000 jobs since last July, though it added 4,000 jobs last month. Most of those losses are in the telecommunications sector. Health care continues to add jobs at a robust pace. Some of these health-care jobs are office-, lab- or life science-building-based, which bodes well for absorption in those categories.
Construction: Employment in other major industries, including construction and manufacturing, improved in July. Manufacturing added 16,000 jobs and is now up by 65,000 over the past year. Construction added 6,000 in July and has increased by almost 200,000 over the past year. Some specialty construction jobs continue to face significant labor shortages, so a leveling-off of job growth for this sector would not be surprising. Rising wages may draw more workers in, but acquiring the necessary skills for certain trades takes time and will not be relieved in the short term.