“You can’t use a model for this”, Morgan Stanley’s Chief US Economist, Ellen Zentner, sighed on Friday morning, describing the unprecedented level of ambiguity surrounding the US labor market in the wake of the largest shock since the Great Depression.
The comically wide range of estimates for the July jobs report was indicative of extreme indeterminacy. Recent data, including an underwhelming ADP report and stubbornly high jobless claims, suggested markets could be in for a disappointment. That, despite Donald Trump teasing a “big number” ahead of the release.
Against that backdrop, the US economy added 1.8 million jobs last month, the BLS said Friday. That is ahead of consensus, which was looking for 1.48 million. At one end of the range was a prediction for a 600,000 decline. At the other end was a call for a gain of 3.2 million.
Revisions added a net 17,000 to May and June, when the market was blindsided by large upside surprises. Those figures are now 2.725 million and 4.79 million, respectively. The previous two months’ encouraging numbers helped recast the narrative — or at least until surging coronavirus caseloads in several large US states forced a pause in the re-opening push.
Friday’s report may help alleviate some concerns that reinstated containment measures in the Sun Belt put a dent in hiring.
The unemployment rate (which fell in May, defying expectations for a surge to Great Depression-like levels, and dropped again in June) came in at 10.2% for July. That is better than estimates. Economists were looking for 10.55%. Counting misclassified workers, the unemployment rate would have been around 1% higher.
Manufacturing payrolls rose 26,000 for the month. Consensus was looking for a far larger print. Private payrolls rose 1.462 million, breezing past expectations for 1.18 million.
“Employment in leisure and hospitality increased by 592,000, accounting for about one-third of the gain in total nonfarm employment in July”, the government said. “Employment in food services and drinking places rose by 502,000, following gains of 2.9 million in May and June combined”.
That’s somewhat surprising given the contraction-territory print on the employment gauge for ISM services in July, not to mention all manner of evidence to suggest that restaurants, bars, and food services businesses in general suffered mightily over the last two months.
Government employment rose by 301,000 in July, still 1.1 million below its February level.
The figure (below) shows you the progress on recovering the pandemic plunge, if you will.
Average hourly earnings rose 0.2% MoM, and 4.8% YoY. Those are both above expectations. The market was looking for a decline on the MoM print. Obviously, these numbers are of secondary importance right now, and not just because they’re distorted.
Headed into the report, Treasury volatility, as proxied by the MOVE index, was languishing near record lows. 10-year US yields recently fell to the low-end of the range that’s prevailed for months, and the curve has shown a disposition to bull-flatten despite increased long-end issuance to fund stimulus. An in-line report (considering the wide range) isn’t likely to move the needle.
“We’ve now seen three straight months where NFP has beat ADP by well over 1 million jobs”, BMO remarked.
The jobs numbers for July are set against protracted negotiations in Washington around the next stimulus package which, if not agreed by Saturday, may prompt The White House to take executive action.
It’s at least possible these numbers will reduce the sense of urgency, but one sure way to derail any positive market sentiment engendered by the better-than-expected read on the labor market would be for lawmakers to come up short on another round of stimulus.