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The U.S. economy added 255,000 jobs in July, according to Labor Department figures released on Friday.
The numbers trounced analysts' expectations of 180,000 new jobs, adding more curves to the rollercoaster of job creation, with May showing a (revised) gain of only 24,000 in nonfarm payrolls to June's blockbuster 292,000 (also revised, said the Labor Department).
“We are expecting to see that the job growth in the U.S. will slow into the coming months and year. That’s to be expected at this stage of the economic cycle,” said Paul Christopher, head global market strategist at the Wells Fargo Investment Institute. “We’re in the 7th inning.”
BlackRock’s chief fixed income strategist Jeff Rosenberg concurred. “We’ve seen a notable slowing in the headline figure,” he said. “There are some questions of interpretation around what that means.”
The question is whether job growth is slowing because the economy is slowing and demand is weakening, or whether companies have lots of open jobs they want to fill and a lack of qualified candidates to hire.
There are economic indicators that could point to either situation being the case.
Last week’s measure of quarterly GDP growth was disappointing, coming in at an annualized rate of just over 1 percent, less than half what economists were expecting. Some say this indicates that the recovery is downshifting rather than accelerating, a worrying prospect.
“The backdrop is we’ve had pretty generalized slowing this year in payrolls, a lot of it in construction, a lot of it in retail trade… and of course we’ve had this incredible volatility the past three months that caught the Fed’s attention,” said UBS economist Samuel Coffin.
“The new GDP numbers suggest it has more to do with the slowing of the economy. I think more has to do with that slowing overall — the drag from exports, the drag from inventories,” he said.
Most economists now believe it’s less likely that the Federal Reserve will raise the benchmark interest rate at its September meeting, with some suggesting no further increases will take place in 2016, especially if wage growth continues to increase at an annualized pace below 3 percent.
“We don’t expect that to be this year. We think the Fed will be exceptionally cautious,” Christopher said, given the financial volatility overseas due to events like Brexit and worries of a slowdown in the Chinese economy.
On the other hand, new consumer spending figures by the Commerce Department this week showed gains in consumer spending, suggesting that Americans have both the money and the confidence to go out and buy goods and services.
In a statement accompanying the ADP numbers, Mark Zandi, chief economist of Moody’s Analytics (which works with ADP on its monthly reports), leaned towards a positive reading of the financial tea leaves.
“Job growth remains strong,” he said. “Businesses are having a more difficult time filling open job positions.”
If this is the case, this slower rate of job creation could finally give a shot in the arm to labor force participation and worker earnings.
The labor force participation rate, on a downward track well before the recession as more Baby Boomers reached retirement age, has fallen further since the recession, but economists are divided on how much of the current rate — it’s been hovering at or slightly below 63 percent for nearly three years now — can be chalked up to demographic changes.
An increase in the percentage of employed Americans could indicate that higher wages are drawing more discouraged workers off the sidelines and back into the labor pool.
Sluggish wage growth has been one of the more vexing aspects of the economic recovery. Consumer spending makes up somewhere in the ballpark of two-thirds to 70 percent of our economy, depending on who’s counting, so when Americans earn less, they provide less fuel to drive the economy forward.
“From an economic point of view, it’s the average hourly earnings, it’s the wage growth as a measurement of how tight the economy is — this is important because it feeds directly into income,” Rosenberg said. “Wages are a lagging indicator… it’s telling us that for this recovery, the tightness of the labor market is finally starting to show up,” he said.
“We can expect that average hourly earnings should continue to remain firm or rise,” Mark Hamrick, senior economic analyst at Bankrate.com, said via email. Hamrick added, though, that the pace still is a concern. “The recent 2.6 percent annualized increase still remains short of where we’d like it to be and where we might have expected it to be by this point in time,” he said.
“We’re hearing more anecdotal evidence of companies being willing to pay more than minimum wage [but] we need to see that accelerate a little more,” Christopher said.