The July Jobs Report Was Found Wanting

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by: Shock Exchange
Summary

The economy created 164,000 jobs in July.

Average wages grew over 3 percent.

The average work week and average monthly wages fell versus June.

The jobs report was found wanting. Economic growth could be next.

Investors should avoid cyclical names and highly-indebted companies.

Source: Financial Times Source: Financial Times

The July jobs report showed 164,000 jobs were added. In June, the report showed 224,000 jobs, which was later revised down to 193,000:

Non-farm payrolls rose by a net 164,000 in July, the Bureau of Labor Statistics said on Friday, matching Wall Street’s median forecasts. That marked a slowdown from June, whose jobs growth was revised down from 224,000 to 193,000.

Professional and technical services, healthcare, social assistance and financial activities were the sectors that showed notable job gains. Manufacturing, one of the sectors most at risk from the US-China trade war, added 16,000 jobs last month.

Professional and technical services jobs increased by 31,000, driven by computer systems design. Healthcare jobs rose by 30,000; this followed a 35,000 increase in June. Jobs in mining and manufacturing increased by 5,000 and 16,000, respectively. The trade war with China has created headwinds for the U.S. economy and certain industrial companies. I have been waiting for mining and manufacturing jobs to turn down, but that was not the case this month. If mining and manufacturing jobs prove resilient then it could give President Trump more ammunition going into the 2020 presidential election.

Unemployment Rate Steady At 3.7 Percent

June's unemployment rate was 3.7 percent and it held steady at that level last month. It is well below the 5 percent threshold considered full employment. There are still nearly 96 million people not in the labor force, a decrease of 183 thousand versus June. The labor participation rate was 63.0 percent, up from 62.9 percent in July. The increase in the number of people in the labor force could keep the unemployment rate from falling or even cause it to increase in the future.

Unemployment this low should portend an economy that is overheating. Is the low employment rate due to strong jobs creation or due to the fact so many people are not in the labor force? The president has previously touted a low unemployment figure as proof of an economic boom. However, the labor participation rate has not been consistently at or below 63.0 percent since the Carter administration.

Average hour wages were $27.98, up 3.2 percent versus the same period last year. The average workweek was 34.3 hours versus 34.5 hours in the year earlier period and 34.4 hours in June. Average monthly wages were $959.71 versus $959.76 in June. Monthly wages fell month-over-month. This likely portends workers cannot command higher wages usually indicative of a white-hot jobs market.

What Will Be The Federal Reserve's Next Move?

The Federal Reserve recently cut interest rates by 25 basis points due to a poor economic outlook. The rate reduction came shortly after the Fed hiked rates in December. Stocks retreated after the rate cut. President Trump imposed additional tariffs on goods and services imported from China. That did not help financial markets. That said, President Trump implied the rate cut was not steep enough:

It begs the question, "What will be the Fed's next move?" After a decade of money printing, tax cuts and quantitative easing investors continue to watch the Fed. Apparently, we still need the Fed to spur the economy and financial markets.

Growth in personal consumption expenditures ("PCE") - the Fed's measure of inflation - has consistently undershot the Fed's 2.0 percent target. In my opinion, the Fed has done its job. It is now time for fiscal policy to kick in. GOP tax cuts may have helped spike stocks and spurred more share repurchases, but it may not have done much for the economy. Otherwise, why would PCE growth remain anemic? Secondly, the trade war with China has created economic headwinds with an uncertain benefit.

The ten-year treasury rate is currently below 2.0 percent. Low rates are reverberating through the economy in the form of low rates for mortgages and auto loans. If a low cost of capital is not the problem then what would cutting the Fed funds rate solve? The Fed seems to believe its mandate is to fight another recession. It has already halted its balance sheet unwind. The Fed's remaining tool could be another interest rate cut.

Conclusion

The economy could falter regardless of what the Fed does. Investors should avoid cyclical names and highly-indebted companies that need consistent cash flow to service debt.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.