US Payrolls Confirm July Labor Slowdown: Covid redux

• Non-farm payrolls add 1.763 million beating the 1.6 million forecast.
• Unemployment falls to 10.2% from 11.1%, underemployment to 16.5% from 18%.
• Labor market improvement slows, initial jobless claims drop to pandemic low.
• Even with 9.3 million employed, 12.9 million remain to be rehired.
• Dollar gains on report, Treasury yields rise, equities fall.

The re-employment of the US economy slowed in July even as the rise in jobless claims reversed and the Covid wave retreated in many of the affected states.

Non-farm payrolls rose 1.763 million last month topping the 1.6 million forecast and the unemployment rate dropped to 10.2% from 11.1% in June also better than the 10.5% consensus estimate. The underemployment or discouraged worker rate dropped to 16.5% much less than its 19.7% prediction and June’s 18%.

Non-farm payrolls

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American firms have rehired 9.253 million people in the last three months but even this rapid rate has left more than half of the 22.16 million jobs lost in Covid shutdowns unfilled.  

Forecast confusion

There was an unusual amount of uncertainty around this Employment Situation Report from the US Labor Department.  Estimates for NFP ranged from a 280,000 loss to a 4 million gain in the Reuters survey.

 The spread of the coronavirus in June and early July in several states had halted or scaled back their reopening plans and prompted much of the indecision.

A report from the Federal Reserve Bank of St. Louis indicated that states with higher numbers of Covid cases in June and July had the weakest job recoveries in those months. Arizona, Florida and Texas were among the states with the steepest gains and the weakest job creation.

Yet even as the market concerns rose those states, Florida, Texas, Arizona and Georgia all reported fast diminishing new case counts and hospitalizations in the closing weeks of July and into August

Initial jobless claims, ADP and PMI

Initial jobless claims, a weekly number that provides near real-time labor market information rose from 1.307 million on July 10, the pandemic low, to 1.435 just two weeks later.  This excited speculation that the returning virus had pushed the labor market back into decline.  In fact the next week claims dropped unexpectedly to 1.186 million, a new low, well beneath the 1.415 forecast.

Initial jobless claims

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The private payroll company ADP caused much consternation when its July report listed just 167,000 new positions barely one-tenth of the 1.5 million prediction.

ADP Payrolls

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Purchasing manager’s indexes added to the confusion when the manufacturing and services versions rose sharply in July and new orders for service firms struck an all-time high, though the employment indexes remained in contraction.

GDP and job distribution

The Atlanta Fed GDPNow third quarter estimate for annualized growth edged up to 20.5% after the NFP release from 20.3% prior.  The US economy fell at a 32.9% annualized rate in the second quarter after a -5% drop in the first.

Bars and restaurants which  have been some of the hardest hit establishments as shutdown and social restriction  severely limited business had the largest groups of returning workers,  502,000 of the leisure and hospitality total of 592,000.

Government employment rose 301,000 and retail added 258,000 as did health care 126,000, professional and business services 170,000 and manufacturing 26,000.

Average hourly earnings rose 4.8% on the year in July, beating the 4.2% forecast but down 0.1% from June.  Wages gained 0.2% on the month which was much biter than the -0.5% predictions and the 1.3% drop in June.  Wages have been falling as lower paid workers return to employment in large workers.

Unemployment fell across all demographic categories. The rate for Whites dropped to 9.2% from 10.1%, for Blacks falling to 14.6% from 15.4% and for Hispanics to 12.9% from 14.5%.

Market reaction

Markets had little reaction to the payroll report. While it main attributes, NFP and the unemployment rates were better than expected, the improvement was not enough to fully dispel the negative impact of the second Covid wave on the US economy.  Even if the pandemic had limited impact, job creation in July was just one-third of that in June.

The Dow was down 46 points to 26340 at 1:28 pm EDT and the S&P 500 was off 8 points to 3341.  The yield on the 1-year Treasury was three point higher at 0.564% and the 2-year was up one point to 0.129%.

Currencies saw the greatest movement with the euro falling below 1.1800 with all of the drop coming in the wake of the NFP release.  The USD/JPY jumped about 50 points to just 106.03 before going to ground under the figure and Dollar Canada rose to nearly 1.3400 from 1.3320.

EUR/USD, 15 Minutes