DAILY ECONOMIC DATA

July Employment Report

Non-farm payrolls increased 92,000 in July while revisions to May and June subtracted 8,000 from payroll growth. The consensus expected a gain of 127,000.

In contrast, private sector payrolls increased 120,000 in July with upward revisions to May and June adding another 33,000. This means private sector payrolls were 153,000 higher in July than reported in June.

The unemployment rate increased to 4.6% (4.647% un-rounded), the highest level since August 2006.

Average hourly earnings increased 0.3% (0.35% un-rounded) and are up 3.9% versus a year ago, consistent with nominal wage gains in the late 1990s.

Implications: Today’s jobs report contains both positive and negative elements. On the positive side, payroll gains remain strong in the private sector and average hourly earnings continue to grow at a robust rate. Note that all of the downward revision to total payrolls in May and June was due to government payrolls, not the private sector. On the negative side, the unemployment rate moved up to the highest level in almost a year, civilian employment declined 23,000 and the number of hours worked ticked down slightly. In the short-term, the strength in the labor market we have seen in the past few years may downshift, reflecting the lagged effects of slow economic growth in late 2006 and earlier this year. However, we expect this to be short-lived and for job gains to rebound to higher levels given that real GDP growth has already re-accelerated. The underlying trends in the job market are strong. In the past twelve months, payrolls are up an average of 156,000 per month while civilian employment is up an average of 150,000. With profit margins still high, firms have an incentive to expand, thereby creating more jobs and bidding up wages.

July ISM Non-Manufacturing Index

The ISM non-manufacturing business barometer (a measure of production growth in the services sector) declined to 55.8 in July. The consensus expected a decline to 59.0 from the June level of 60.7. Levels above 50 signal expansion and levels below 50 signal contraction in the services sector.

The overall index was driven down by a decline in the new orders component to 52.8, which is the lowest level since 2003, although still positive.

The employment component declined to 51.7 after last month’s rise to 55.0, which was the highest in a year.

The prices paid component fell to 61.3 versus a level of 65.5 in June.

Implications: Although today’s ISM report for the non-manufacturing sector was not as strong as last month’s figure, it still signals healthy growth in the service sector. The overall business barometer index was above last year’s level and the 3-month and 6-month moving averages for the index are strong. Today’s data is consistent with our forecast that real GDP will grow at a 3% annual rate in the third quarter.