It’s easy to get dismayed by the headlines because the total job growth in July was 157,000, which missed estimates for 190,000 jobs created. Usually, these reports have details which conflict with the headlines. This one is no different as the fundamentals of the labor market remain strong. The best part of this report was the prior two months saw a net gain of 59,000 jobs after revisions. June now added 248,000 jobs instead of 213,000 and May added 268,000 instead of 244,000 jobs. That total gain from revisions more than makes up for the miss in the July headline number and shows how the July report can also be revised in the next two months.

Temporary Weakness

This report was dragged down by the government as it lost 13,000 jobs. The sharp decline in local government jobs may have been a seasonal issue because in July teachers lose their jobs for the summer. The sporting goods, hobby, book, and music stores lost 31,800 jobs mainly because of the Toy R Us bankruptcy. One good one-time item was that auto manufacturers skipped their usual summer retooling which usually causes layoffs. With these reasons, it’s important to realize what is good is bad and what is bad is good. We want to see negative one time items because it means there is underlying strength.

Source: lost 13,000 jobs

Underemployment Rate Falls

The underlying numbers of this report were great because employment improved while wage growth didn’t accelerate too fast, which would cause the Fed to hike rates quicker. It was a Goldilocks report. The unemployment rate fell from 4% to 3.9% which met estimates. The underemployment rate fell from 7.8% to 7.5% as you can see in the FRED chart below. 

Source: FRED chart below

This is the lowest level since April 2001. The rate troughed at 6.8% in that cycle. When the rate was falling, it first hit 7.4% in May 1999. If this cycle follows the same trajectory, the rate will trough in 17 months which is December 2019.