US Non-Farm Payrolls: Slower but the Fed is cheering

Non-farm payrolls started the third quarter almost exactly at trend after a first half that saw some of the most volatile job numbers in almost a decade.

The US economy added 164,000 new workers, 16,000 in manufacturing and annual wage compensation rose 3.2% in July, reported the Labor Department on Friday. The unemployment rate was stable at 3.7% and labor force participation rose to 63.0%.

Reuters

In the first seven months payrolls have averaged 165,000. The range from to 312,000 in January to 56,000 in February was  the largest one month drop in nine years.  

Two months after the February plunge payrolls sank from 216,000 in April to 62,000 in May. These two months combined with the ADP National Employment figures of 46,000 in May and 112,000 in June stirred concerns that the labor market was feeling the pressure of the trade war with China. 

Business sentiment had been falling since late 2018 and the manufacturing employment PMI indexes were indicating potential weakness in hiring.

Those worries have subsided after two good months, June’s revised 193,000 and this July release at 164,000.

Nonetheless the NFP averages have declined this year. The 3 month moving average has fallen from 245,000 in January to 139,666 in July and the 12 month average has dropped from 235,000 in January to 187,166 last month. The January average was the highest since August 2015.

The manufacturing payrolls over the last two months—16,000 in July and 12,000 in June--were especially reassuring as March had registered the first loss, -3,000, since July 2017.  The average of March, April and May was less than 1,000, a paltry 666. The three month moving average has fallen from 25,333 last November to 10,000 in July and the 12 month average has slipped from 24,166 in July 2018 and 22,083 in January and to 13,083 in July.

Reuters

The burst of factory hiring from December 2016 to February 2019 with employment averaging 18,259 per month was the best 27 month period for factory work in 24 years, since September 1995.

Reuters

The healthy job market will buttress the Federal Reserve’s argument that “The outlook for the US. economy remains favorable,” as Chairman Powell said after the FOMC meeting on Wednesday. The enacted 0.25% cut in the base rate, the first reduction since December 2008 is a prophylactic against trade tension and its effect on the world economy.

Mr. Powell said that the Fed was acting to “insure against downside risks from weak global growth and trade policy uncertainty.” To underscore the point the Chairman mentioned trade and trade policy 27 times in his statement and news conference.

The better than expected increase in wages in July, 0.3% against a 0.2% forecast and the revision to the June figure, also from 0.2% to 0.3% and the rise in the annual wage gain to 3.2%  from 3.1% in June answers the Fed’s second logic for the rate cut. 

Chairman Powell has noted that the tight labor market has helped to spread employment and wage increases into neglected sectors of the US labor force and that African-American and Hispanic unemployment were at their lowest levels in history.  

This progress was in accord with the Fed’s Congressional mandate for full employment and might be lost if the expansion, which became the longest on record in July, were to falter or end in a recession.

Gross domestic product the widest measure of economic activity grew at a 2.1% annualized rate in the second quarter, down from 3.1% in the first as businesses have curtailed investment spending,  beset by the uncertainty of the trade dispute.