Jobs report preview
We estimate non-farm payrolls rose 175,000 in July in line with consensus of 180,000 , both significantly lower than the large increase in June of 287,000. Changes in non-farm payrolls are very volatile by nature so the large increase in June only partly offset the weak jobs reports in April and May, as the three-month average monthly increase in non-farm payrolls in June was only marginally below 150,000. Overall employment growth has levelled off this year compared with the past couple of years, despite the strong June report. This could be a sign that hiring has slowed, as we are close to full employment, meaning that employment has become more expensive and it is more difficult to find employees with the right qualifications. However, we have not seen a pickup in productivity growth, as employment growth has slowed simultaneously with weak economic growth over the past three quarters. This is quite worrisome, as it could be the case that the underlying momentum in the US has slowed and thus the July report will attract much attention. A strong report could reduce some concerns over the current economic situation in the US.
We estimate average hourly earnings increased 0.2% m/m in July in line with the recent trend implying an annual growth rate of 2.6%. Average hourly earnings fluctuate a lot but, in general, we have seen a pickup in wage growth since the beginning of 2015, as the labour market has continued to tighten. This said, wage inflation is still subdued. We estimate the unemployment rate was unchanged at 4.9%.
We estimate employment growth continued to be driven by the service sector in July, with jobs growth of 150,000. US growth continues to be driven mainly by private consumption while non-residential investments continue to fall. Thus, we expect employment in the service sector to continue growing steadily while manufacturing employment growth will continue to fluctuate around zero.
Fed on hold for the rest of the year
Although the US economy has so far been resilient to Brexit, it is worrisome that before the Brexit vote we already had a combination of weaker employment and GDP growth. We do not think the US economy is heading for a recession but the risk is still that the US will also disappoint in H2 16. It is only a little more than a month since the UK voted to leave the EU and we still think the risk is that the downturn in the UK spreads to the rest of Europe and the US. In particular, Brexit uncertainties may imply we are not about to see a turnaround in investments, which have been weak for several quarters.
We still think the Fed is on hold for the rest of the year and most likely until June next year. This is due not only to the concerns that growth and employment growth may continue to disappoint in the second half of the year if Brexit uncertainties spread but also to concerns that the underlying momentum in the domestic part of the economy is weak.
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