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Looking at July’s Labor Report



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The labor market in July had some good data, some soft data, and some numbers right in the middle. The best news was that the unemployment rate dropped to 7.4 percent, the lowest since December 2008. Civilian employment, an alternative measure of jobs that includes small business start-ups, rose 227,000, helping push the jobless rate down. However, the jobless rate also dropped because of a 37,000 decline in the labor force. (Caution: Although it happened in July, a drop in the labor force is not the key behind the trend decline in the jobless rate. In the past year, the unemployment rate has dropped 0.8 points while the labor force has increased 686,000.)

The so-so data was a below-consensus 162,000 increase in payrolls — only 136,000 including revisions to prior months. Notably, the two strongest sectors were retail (+47,000) and restaurants and bars (+38,000). In the past year, retail has added more jobs than in any year since 2000; restaurants and bars more than in any year since at least 1990. This suggests employers, when possible, are hiring more part-time workers to avoid Obamacare.

The worst news in today’s report was a slight decline in total hours worked as well as in wages per hour. Still, in the past year, hours are up 2.1 percent while wages per hour are up 1.9 percent, for a 4 percent gain in total cash earnings in the past twelve months. After adjusting for inflation, these earnings are still up 2 percent from a year ago. In other words, despite July, the trend is for workers generating more purchasing power.

The labor market once again debunks the theory that the sequester is hurting the economy. Since the sequester went into effect, nonfarm payrolls are up an average of 173,000 per month versus 136,000 for the same four months (March to July) a year ago.

The big financial-market question is how the Federal Reserve will react to today’s report. We think the numbers still support the case that it will announce a tapering of its asset purchases in September. And we still expect an end to quantitative easing announced in March 2014.

Obviously, the labor market is far from perfect. What’s holding us back is the huge increase in government, particularly transfer payments, over the past several years. Despite that, entrepreneurs and workers are gritting out a recovery and the plow-horse economy keeps moving forward.



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