Was the U.S. jobs report a disappointment? No. Not where it matters most – that is, to the Federal Reserve Board.
OK, so the increase in nonfarm payrolls in July, at 162,000 jobs, was well below consensus expectations (185,000) and was the weakest month since March. What's more, the numbers for the prior two months were revised downward, by a total of 26,000 jobs (7,000 in June, 19,000 in May). While the numbers aren't truly bad by any stretch of the imagination, it does imply that the labour market isn't quite as hot as we thought – perhaps suggesting that some moderation in expectations for household consumption in the current quarter may be in order.
Yet crucially for the Fed, the unemployment rate dipped substantially – to 7.4 per cent, the lowest rate since the end of 2008, from 7.6 per cent in June. Given that Fed chairman Ben Bernanke has stated that the central bank expects to wind up its quantitative-easing program of asset purchases once unemployment has fallen to about 7 per cent, this represents a big step toward the end of QE – and, barring a backslip in the next couple of months, adds force to the expectation among many economists that the Fed is on track to begin reducing the size of its asset purchases (known as "tapering") by the fall.
Still, when your job growth slows but your unemployment rate retreats significantly, any decent central banker will want to sift through the details to figure out if there's something funny going on there that raises a warning flag. For one thing, how do you get the biggest decrease in unemployment in months, with the smallest job increase in months?
The simple answer is the size of the labour force. In recent months, the labour force has been growing along with the employment totals – evidence that a stronger job market was luring people back into the game who had essentially given up looking. While that in itself was encouraging, it also made the unemployment rate very sticky. But in July, the size of the labour force actually dipped by 37,000 people, giving the rise in jobs a powerful impact on the unemployment rate.
A key question is whether this slowdown in labour force growth will continue; if it is, that would imply an acceleration in the expected decline in the unemployment rate. That seems unlikely. The current labour force participation rate of 63.4 per cent is very close to a historical low, after years of post-financial-crisis decline; it's far below the pre-crisis norms of near 66 per cent. We can expect years of a general upward trend in the labour force before it's back closer to normal – and that should keep declines in the unemployment rate to be, at best, a slow process.
Still, the Fed doesn't need unemployment rate at 7 per cent before it begins tapering, and the July numbers take it considerably closer to its comfort zone to start the process. And looking at the details of the job gains, it's hard to find any worrisome weak spots. Private-sector job creation hummed along at a decent 157,000, while public-sector jobs – a sore point in the U.S. labour market in recent months, as government austerity measures have taken hold – edged up by 1,000. Almost every major sector of the economy showed positive numbers; the only blemish of note was construction's 6,000-job decline. Retailers added nearly 47,000 jobs in the month, evidence of the continued recovery of the U.S. consumer.
Put it all together, and you get a picture that should satisfy the Fed that its timetable for unwinding QE is on track. But we're going to need confirmation from the August and September job numbers before we can lock in the start of the tapering process by the Fed's Sept. 17-18 policy meeting.