The July U.S. employment report was solid, with payrolls increasing by 255,000 and the unemployment rate unchanged at 4.9%. Today’s report marginally increases the probability that the U.S. Federal Reserve (Fed) will raise rates in September, but more importantly it is a vote of confidence for the U.S. economy at a time when some were calling its health into question.
• Payrolls increase by 255,000 in July, with strength in professional and business services, leisure and hospitality, financial services, and health care. However, mining continues to be a weak spot, with employment in the industry down 26% from its peak.
• The payroll figures for May and June were both revised higher, with May increasing by 13,000 and June increasing by 5,000. Given the particularly strong June payroll report, these upward revisions came as a welcome surprise.
• The unemployment rate was unchanged at 4.9%. Growth in the labor force was just shy of growth in the number of employed persons, which led the unemployment rate to hold steady and the labor force participation rate to tick higher.
• The work week increased modestly in July, and average hourly earnings for production and nonsupervisory workers increased by 2.6% from a year prior. This is the strongest pace of wage growth that we have seen since January 2010, and points to a labor market that is in the process of tightening.
• The U-6 rate, a broader measure of unemployment, moved slightly higher to 9.7%. This stemmed from an increase in the number of persons working part-time for economic reasons, which was larger than the decline in the number of people marginally attached to the labor force.
Today’s report shows that the U.S. economy is healthy, and increases the probability that the Fed will hike rates in September. Given the very dovish nature of the current Fed, this would require upcoming data releases to be impeccable, but the July payroll figures have made the May report feel like a distant memory. Janet Yellen’s speech in Jackson Hole later this month will be a key event for Fed watchers, as it could be used as an opportunity to prep the market for a September hike, but the risk to this outlook is that financial conditions tighten on the back of rising rate hike expectations and the corresponding dollar strength. That said, if global financial conditions remain stable, September could prove to be a more interesting month than many originally expected.
Originally plublished by David Lebovitz, J.P Morgan
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