The Job Market and the Consumer Outlook

There’s a fair amount of noise in the monthly employment data, but July figures remained consistent with expectations of moderately strong growth in the near term. One glaring weakness remained. That was in retail payrolls (up modestly, but down significantly since January). Job growth should be supportive for spending. Real wage growth, weak in early 2017, appears to be picking up, and that is a good sign.

Nonfarm payrolls rose by 209,000 in the initial estimate for July. The monthly change is reported accurate to ±120,000, meaning that there is about a 90% change, or level of confidence, that the true monthly change was between +89,000 and +329,000. So why do financial market participants put so much weight on the figure? In addition to statistical noise, seasonal adjustment can be tricky (unadjusted payrolls fell by 1.039 million in July, reflecting the end of the school year). Looking at longer-term averages reduces (but does not eliminate) much of the noise in the payroll data. Private-sector payrolls appear to be trending at about the same pace as last year, which is still beyond a long-term sustainable rate. We know that because the unemployment rate continues to trend lower.

The unemployment rate edged back down to 4.3% in July, about even with May’s 16-year low. Labor force participation remains well below its pre-recession level, but that’s largely due to the demographics (an aging population). The employment-to-population ratio for prime-age workers (those aged 25-54) is trending higher and is near where it was before the recession.