Hiring Strong in July, but Details Give Fed Breathing Room

Employment rose by 209,000 jobs in July, but flat average hourly wages and an uptick in the unemployment rate take some heat off of the Fed to raise rates sooner than currently signaled. 

Trend in Hiring Remains Strong

Hiring moderated in July, with employers adding 209,000 new jobs. While below market expectations, the trend in hiring remains solid. Job growth has run above 200,000 for six consecutive months, a feat not achieved since 1997. Hiring remained widespread across industries, with employment in professional & business services firming up 47,000, manufacturing up 28,000, construction up 22,000 and retail trade up 27,000. The index of aggregate hours worked has risen at a 3.4 percent annualized rate over the past three months, supportive of a modest pickup in GDP this year relative to the two-percent trend that has characterized the recovery and expansion. 

Labor Force Participation Stabilizing

The unemployment rate edged up to 6.2 percent over the month, but the rise comes as labor force participation rebounded slightly. While the labor force participation rate still sits near a 36-year low, the downward trend that has been so pervasive over the past five years has at least paused. Since October, the participation rate has more or less moved sideways. Overall, the trend in hiring remains strong enough to lower the unemployment rate, even with stronger labor force growth. The employment-population ratio was unchanged in July, but is up 0.3 percentage points over the past year. 

After falling by more than 500,000 workers in June, full-time employment rebounded by 285,000 jobs in July. Looking through the monthly noise that surrounds the household survey, the trend between full-time and part-time employment remains favorable. Over the past year, the number of  workers employed full-time has risen by an average of 194,000 per month, while part-time workers have fallen by 10,000 per month.

Flat Wages in July Takes the Heat Off the Fed 

Average hourly wages were up only $0.01 in July. On a year-ago basis, wage growth ticked up to 2.0 percent, but the pace remains too slow for the Fed. On trend, however, wage pressures appear to be building. The decline in the unemployment rate over the past year has signaled a substantial reduction in labor market slack, which traditionally has led wage growth by nearly a year. Yesterday’s Employment Cost Index showed wage costs increasing at the fastest pace since the financial crisis, while small business plans to increase compensation have picked up. We expect wage growth to accelerate over the remainder of the year and improve sufficiently to the point that the Fed begins to raise rates around the middle of next year. For now though, the uptick in the participation rate and the unemployment rate supports the Fed’s view that labor market slack persists.