• July payroll employment gains slowed to 157k after upwardly revised increases the previous two months of 248k (213k previously) and 268k (244k).
  • The separate, and more volatile, household survey indicated a stronger employment gain in July of 389k which, in conjunction with a more modest 105k gain in the labour force, lowered the unemployment rate to 3.9% after unexpectedly rising 0.2% in June to 4.0%.
  • Despite a low unemployment rate, the annual increase in wages remained unchanged at 2.7%.

Our Take:

July’s employment gain of 157k was below market expectations of a 192k increase though the shortfall was more than offset by upwardly revised gains of 248k (213k previously) and 268k (244k) in June and May, respectively. As well, with labour markets at capacity, the slowing reflects more a supply issue of a diminishing pool of available skilled workers rather than an indication of slackening demand by businesses. Confirmation of tightening labour markets was conveyed in today’s report by the July unemployment rate dropping back down to 3.9% after unexpectedly jumping 0.2 percentage points in June to 4.0%. The Fed’s long-run expected range for the unemployment rate, widely viewed as its assessment of full employment, is estimated at a higher 4.3% to 4.6%.

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The Fed is likely to view today’s employment report as reinforcing its statement following Wednesday’s policy meeting that labour markets remain strong. Though the central bank opted to leave the fed funds range unchanged at 1.75% to 2.00%, it also indicated that further gradual increases in official rates will be required going forward to insure that inflation remains close to its 2% objective. Our expectation is that gradual tightening will imply 25 basis point-hikes each quarter through the end of next year with the fed funds range eventually rising to 3.25% to 3.50%. The fed’s statement indicated that the risks remained balanced. Though not explicitly stated, rising trade protectionism is likely viewed as the main downside risk with continued strong consumer response to recent tax reductions presenting an offsetting upside risk.