The disappointing jobs report runs counter to the market’s run to milestone levels. This is particularly so since bad economic news may not be good news for the market, as today’s report is unlikely to materially shift the Fed’s thinking on the ‘Taper’ question.
July non-farm payrolls came in at +162K vs. expectations of about +183K and negative revisions to June and May. The June number got revised down to 188K from 195K and May got lowered 176K from 195K. Private sector jobs totaled 161K in July (government added 1K jobs) vs. 196K in June and 187K in May.
In another key negative, average hourly earnings dropped for the first time since October last year, down -0.1% in July vs. up +0.4% in June. A key contributor to the earnings drop is the fact most of the job additions were in industries that typically pay lower wages like retail and leisure and hospitality. The unemployment rate dropped to 7.4% from 7.6%. The drop in the unemployment rate was largely a function of lower labor force participation rate, the share of the U.S. population that is either working or looking for work, 63.4% in July vs. 63.5% in June.
A charitable view of this report can be that it isn’t way off the past year’s trend line. But the disappointing part is that this report runs counter to the positive tone of other recent economic data. Thursday’s ISM survey, Wednesday’s ADP report, and the persistent recent downtrend in weekly Jobless Claims had raised hopes of a strong jobs reading this morning, with ‘whisper’ numbers indicating expectations north of 200K.
Those data points had convinced investors that improved economic growth more than made up for the rising interest rates as a result of changes to the Fed’s QE program. Wednesday’s GDP report and today’s jobs report leaves us in a bad situation. The Fed may be ok with this environment and will still move towards ‘Taper’ later this year, but the market wouldn’t get the economic and earnings growth that it was pricing in.