Strong Jobs Report
July jobs report marginally beat expectations. Estimates were lowered at the last minute to 1.675 million which made them easier to surpass. Even still, 1.763 million jobs created is much better than expected. Many thought there would be about 0 jobs created. This report was down from last month’s 4.791 million.
Even before the economic slowdown, we expected fewer jobs created in July since there are less people who can get a job. There was less room for improvement. This report makes it look like there hardly was a slowdown.
This report makes me wonder how good job growth could have been without the spike in COVID-19 cases. An initial prediction is for about the same amount of jobs created in August. In general, the trend is towards less job creation each month. Similar job creation in August would be fantastic. Clearly, the household pulse survey and the ADP report were too negative.
Household pulse survey was unadjusted. It needed to be adjusted higher, but most didn’t realize it needed to be adjusted by that much. It also could have been plain wrong. ISM services employment reading also was wrong. There were a lot of reasons to bet against this report, but it was still good. Since we expect a cyclical rebound, it doesn’t go against that intermediate term projection.
Where The Jobs Were
Most negative aspect of this report was there were 301,000 jobs created by the government. There were 1.446 million private sector jobs created which slightly missed estimates for 1.525 million. Even so, this beat the ADP result by almost 1.3 million. It’s very rare for there to be such a large miss. It’s also very rare for there to be over 1 million jobs added in the first place. There is almost never an opportunity for the two reports to be this far apart.
As you can see from the chart below, leisure and hospitality dominated job creation as there were 592,000 jobs added in the industry. This industry pays the least, but it’s still good to see the jobs back because so many were lost. We can expect even more jobs to come back in August as the hotspots cool off. Retail trade is in a similar boat as it gained 258,300 jobs. Professional and business services added 170,000 jobs which is about triple what ADP showed.
On the negative side, information lost 15,000 jobs which is shocking because the tech sector has been outperforming. Most technology companies don’t have many workers compared to their size. Although, Facebook has been on a massive hiring binge in the past few years.
It's amazing how its decline in gross and operating margins since 2018 has done nothing to hurt the stock. Information is the highest paying industry, so this decline pressured average wages. Manufacturing added 26,000 jobs. Even though manufacturing is starting to heat up, don’t expect this sector to drive a return to normal employment.
Unemployment & Participation Rates
Unemployment rate fell from 11.1% to 10.2% which beat estimates for 10.5%. Peak in the last recession was exactly 10% which means next month we will finally be below that peak. This is much better than the last recovery; in the 3 months following the peak, the unemployment rate only fell to 9.8%. In the 3 months since the peak in April, the unemployment rate has already fallen 4.5%.
This rate will likely get below 8% by the end of the year. Then in 2021 it will slowly get back to normal. We could be near full employment by 2022. Underemployment rate fell from 18% to 16.5%. Since it fell more than the U3 rate, that means there were fewer people marginally attached to the labor force.
Labor force participation rate fell a tick to 61.4%. That’s still pretty good considering the fact that it rose 0.7% last month. Generally, when this metric rises, it reverts back. It’s like 2 steps forward and 1 step backward. It was at 63.4% before the recession. Remember, it will likely never get back to that rate because it’s in a long term downtrend as baby boomers age and retire.
By the time the labor market gets as full as it was in February 2020, there will be millions more boomers retired. Many used the pandemic as an excuse to retire. Prime age labor force participation rate fell from 81.5% to 81.3%. This one is more likely to come back to its pre-recession high because it’s not impacted by demographics. It’s only 1.7% below where it was in February
Wage Growth Beats Estimates
Average monthly hourly wage growth was 0.2% which beat estimates for -0.7% and last month’s reading of -1.3%. Comparison was very easy. Average hourly earnings growth was 4.8% on a yearly basis which was down one tick from June and above estimates for 4.1%. Growth was pretty strong when you consider that the most jobs were created in the lowest paying industry and the most losses were in the highest paying industry.
As you can see from the chart below, payrolls times average hourly earnings times the workweek length showed monthly growth of 1.2%. That’s a nominal income growth proxy. Goal is to get this figure back to the previous peak so we don’t need to worry about a possible stimulus.
Conclusion
This labor report was very strong. It beat estimates by a lot. Some investors were already bullish on the economy because COVID-19 cases are falling and a stimulus should be coming. With this great report, they are even more bullish because it means we are closer to single digit unemployment. The stock market completely ignored the potential for no stimulus on Friday even though talks broke down.
Basically, the market ignored it because people are getting back to work anyway. Even with a spike in COVID-19 cases, the labor market improved in July. With cases declining, the August report will be fantastic which lessens the need for a stimulus. Plus, one will likely pass next week, and the market probably agrees.
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