Another Tricky Day: Dissecting July’s Labor Market Report

Key Points

  • The labor market continues to heal; but the level of weakness remains unprecedented.
  • Hard-hit industries brought workers back in July, but the impact of virus-related rolling shutdowns could reverse some of that improvement.
  • Short-term, Congress is negotiating another income-replacement package; longer term, employment sectors in growth mode employ a larger share of the U.S. workforce than those in contraction mode.

The July jobs report was a pleasant surprise, but not without caveats. Nonfarm payrolls increased by 1.76 million; with 1.46 million within the private sector, and 301k within the government sector. The consensus expectation for overall payrolls was 1.48 million. The separate household survey showed the addition of 1.35 million jobs—coupled with a 62k decline in the labor force, it brought the unemployment rate down from 11.1% in June to 10.2% in July. The broadest measure of unemployment—the U6, which includes discouraged workers no longer seeking employment and part-time workers seeking full-time employment—fell from 18% in June to 16.5% in July.

“V” in change, but not level

As you can see in the charts below, the monthly change in nonfarm payrolls looks like more than a complete recovery from the COVID-19 implosion; however, in level terms, there remains a long way to go. There are still 31 million people receiving some form of unemployment insurance benefits.

Rebound in Payrolls’ Change But Not Level

Source: Charles Schwab, Bloomberg, as of 7/31/2020.

In total, there have been 9.3 million jobs added over the past three months; but that is less than half of the jobs lost since employment peaked in February. The employment diffusion index rolled over in July—from 75% in June to 61.4% in July—but remains at a relatively healthy level. This means that the majority of industries are hiring. However, hours worked also rolled over; suggesting companies had to cut hours last month due to the virus’ impacts, even if they didn’t lay off additional workers.