Jerome Powell’s efforts to walk back market expectations for additional rate cuts set the stage for the July jobs report to be interpreted through the “bad news is good news” lens.
That is, with the Fed seemingly unconvinced that further rate cuts (let alone a protracted cutting cycle) will be necessary to inoculate the US economy against trade uncertainty, any convincing signs of weakness would be welcome news to the extent lackluster data might help bring policymakers around when it comes to committing to additional easing.
However, the resumption of the Sino-US trade war complicates things. Donald Trump’s announcement that new tariffs on Chinese imports will go into effect on September 1 raises the stakes for the Fed. On one hand, it means trade uncertainties are unlikely to abate. (Powell’s “returned to a simmer” characterization of the trade tensions already sounds stale.) On the other hand, it’s entirely possible that part of Trump’s calculus in reigniting the trade war was to spur the Fed on. The president let his disappointment in Powell’s press conference performance be known on Wednesday evening and the White House clearly wants what the market wants: A commitment to a series of “aggressive” (as Trump put it) rate cuts. That may make the Fed wary of jumping at the opportunity to use lackluster data as an excuse to lean more dovish. That is, the committee will want to avoid the perception that they are being manipulated by Trump’s trade escalations.
This makes interpreting the July jobs report exceptionally difficult.
Headed in, consensus was looking for 166k on the headline. June’s report was, of course, a blockbuster and any further strength would ostensibly argue against rate cuts, although, as noted, the trade tensions muddy the waters.
Ultimately, the July report printed bang in line with estimates. The headline is 164k. Revisions lopped 41k off the prior two months.
June’s headline gain was revised down to 193k. Manufacturing added 16k in July, well ahead of estimates and the most in six months.
Although the numbers are healthy, the three-month average gain slowed to a two-year low.
Unfortunately for the “subdued inflation” narrative, AHE came in hot. Average hourly earnings rose 0.3% MoM, ahead of estimates (0.2%). The YoY print was also hotter-than-expected at 3.2%. That comes on the heels of last month’s core CPI print, which betrayed the briskest pace of consumer price gains since the beginning of 2018.
Ostensibly, rising wages are a good thing, especially to the extent any additional rounds of tariffs will drive up consumer prices, but signs that the Phillips curve is awakening and may be set to “exact its revenge” (as Powell put it back in October) are still a concern for the Fed.
All told, the July report doesn’t appear set to move the needle one way or another, but those could be famous last words.
Actual
- U.S. July Nonfarm Payrolls Rose 164k; Unemp. Rate at 3.7%
- Nonfarm payrolls, net revisions, -41k from prior two months
- Participation rate 63% vs prior 62.9%
- Avg. hourly earnings 0.3% m/m, est. 0.2%, prior 0.3%; Y/y 3.2%, prior 3.1% est. 3.1%
- Nonfarm private payrolls rose 148k vs prior 179k; est. 165k, range 145k-200k from 29 economists surveyed
- Manufacturing payrolls rose 16k after rising 12k in the prior month; economists estimated 5k, range -5k to 10k from 18 economists surveyed
- Unemployment rate 3.7% vs prior 3.7%; est. 3.6%, range 3.5%-3.7% from 75 economists surveyed
- Underemployment rate 7% vs prior 7.2%
- Change in household employment 283k vs prior 247k
Estimates and priors
- Change in Nonfarm Payrolls, est. 165,000, prior 224,000
- 8:30am: Two-Month Payroll Net Revision
- 8:30am: Change in Private Payrolls, est. 165,000, prior 191,000
- 8:30am: Change in Manufact. Payrolls, est. 5,000, prior 17,000
- 8:30am: Unemployment Rate, est. 3.6%, prior 3.7%
- 8:30am: Average Hourly Earnings MoM, est. 0.2%, prior 0.2%
- 8:30am: Average Hourly Earnings YoY, est. 3.1%, prior 3.1%
- 8:30am: Average Weekly Hours All Employees, est. 34.4, prior 34.4
- 8:30am: Labor Force Participation Rate, est. 62.9%, prior 62.9%
- 8:30am: Underemployment Rate, prior 7.2%
The details on manufacturing are not so hot.
“The manufacturing workweek declined by 0.3 hour to 40.4 hours in July and is down by 0.6 hour since a recent peak in August 2018. Manufacturing hours are at their lowest point since November 2011. In July, factory overtime edged down by 0.2 hour to 3.2 hours.”
yes they focus on AHE too much. AHE is computed by taking total income and total hours. if total hours falls by a larger % than total income, it can look like AHE is rising…not a good metric
What’s the best (readily available and frequent) metric for wage inflation?