July 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 157,000 jobs in July -- below expectations of +188,000. In addition, combined May and June employment gains were revised up by 59,000 (May: +24,000; June: +35,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) slipped to 3.9% because employment gains (+389,000) dwarfed the expansion in the labor force (+105,000). 

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Observations from the employment reports include:

* Household and establishment survey results were directionally in sync, although employment gains in the household survey were more than double those in the establishment survey.

* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors, and that appears to have occurred in July. Although imputed jobs from by the CES (business birth/death model) adjustment were significantly above average for the month of July (since 2000), the BLS also applied a roughly average seasonal adjustment to the base data. Had average July adjustments been used, employment changes might have been roughly +46,000 instead of the reported +157,000.

* As for industry details, Manufacturing expanded by 37,000 jobs. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in July at a slightly faster pace than in June. Wood Products employment gained 800 jobs (ISM was unchanged); Paper and Paper Products: +600 (ISM increased). Construction employment added 19,000 (ISM increased). 

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* The number of employment-age persons not in the labor force (NILF) rose by 96,000 (+0.1%), to 95.6 million (within 0.3% of May’s record). Meanwhile, the employment-population ratio ticked up at 60.5%; thus, for every five people being added to the population, roughly three are employed. 

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* The labor force participation rate (LFPR) was unchanged at 62.9% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees rose by $0.07, to $27.05, resulting in a 2.7% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages advanced by $0.03, to $22.65 (+2.7% YoY). Since the average workweek for all employees on private nonfarm payrolls contracted to 34.5 hours (-0.1 hour), average weekly earnings decreased by $0.28 (0.0%), to $933.23 (+3.0% YoY). With the consumer price index running at an annual rate of 2.9% in June, workers appear -- officially, at least -- to be holding steady in terms of purchasing power. 

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* Full-time jobs gained ground in July when advancing by 453,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- dropped by 176,000; non-economic reasons: +228,000. Those holding multiple jobs jumped by 453,000 (to 8.072 million, the highest number since August 2008). 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld increased in July, by $6.7 billion (+3.6% MoM; -1.2% YoY), to $192.5 billion; it is difficult to conclude anything meaningful from the data beyond observing that the YoY falloff reflects lower withholding rates from the Tax Cuts and Jobs Act of 2017. To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending July was 3.9% below the year-earlier average -- well off the peak of +13.8% set back in September 2013.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.