August 3: Payroll Data Better Than Expected

The Federal Reserve and the European Central Bank were in the limelight this week, but the focus is squarely on the U.S. labor market today, following a surprisingly positive monthly jobs report this morning.

The question on everybody’s mind now will be whether this jobs report is a game-changer in terms of the QE-centric debate that has been raging for a while now. In hindsight, the Fed’s decision to stay away from more QE this week seems to have been the right one after all.

The Fed did acknowledge that the economy was decelerating and may require additional accommodation. That assessment was essentially a statement of fact as the pace of job creation had fallen from the first quarter’s 226K monthly rate to the second quarter’s 75K pace.

We know that one data point doesn’t make a trend, but will today’s report prompt the Fed to change its tone? Luckily for the Fed, they will get to see another monthly jobs report before their next scheduled meeting next month.

The Bureau of Labor Statistics (BLS) reported July non-farm payroll gains of 163K, above the roughly 100K expected and the 64K jobs in June (revised down from 80K originally reported). The revisions trend was mixed -- June revised lower and May revised higher, with a net negative revision of 6K for the preceding two months.

Wednesday’s ADP report of strong private sector job gains appears to have been an accurate portrayal of the jobs market. A total of 172K private sector jobs were created in July, compared to 73K in June, with the government sector suffering job losses of 9K.

Manufacturing added 25K jobs in July, compared to 10K in June, with fewer layoffs in the auto sector due to seasonal factors contributing nicely. Service sector jobs totaled 148K, up from 60K in June and 131K in May. Temp jobs totaled 14.1K, down from 21.1K in June. The average workweek remained unchanged at 34.5 hours, while average hourly earnings increased by 2 cents to $23.52. The July average hourly earnings are up 1.7% from the same period last year.

This is a good report, provided it’s not a one-off fluke. The month-to-month volatility in the jobs numbers aside, the monthly average for the year-to-date period is 151K, essentially unchanged from the 153K for the same period in 2011.

When we look at it this way, the economy’s job -reating pace hasn’t changed in a while. Maybe investors will realize that the economy didn’t need Fed support going forward and can sustain itself. We will find out soon enough whether the market appreciates a sustainable recovery or more Fed handouts.

The ISM Services Index is scheduled for release today at 10:00 AM EST, and is expected to increase to 52.2 in July after decreasing to 52.1 in June and increasing to 53.7 in May.