July jobs report: How a big headline miss may be overstating weakness

**Lauren Brice** (0:05)
Welcome back to JP. Morgan's Making Sense. I'm Lauren Brice from the North America Rates Sales Team, here with our Chief US. Economist, Mike Feroli.
Mike, good to have you.

**Mike Feroli** (0:13)
Thanks.

**Lauren Brice** (0:14)
Good to be back. On the first Friday of each month, we sit down to unpack the jobs report, and today we'll cover what the numbers tell us and how they influence your thinking on the path forward for the economy and for the Fed. Lots to chew on in today's data alone, with a large miss on headline number, but a notable drop in the unemployment rate to a low 4.1%.
Can you walk us through your initial read on the report and what stood out to you?

**Mike Feroli** (0:38)
Yeah, sure. So you mentioned we had a big miss on the headline, down 23,000. A lot of that was due to a decline in local government education services of down 50,000. We're not too worried about that. We think some of that may be difficulties seasonally adjusting those numbers around the summer recess.
Nonetheless, private hiring did cool to only 30,000 last month, and it was revised down the prior two months. So I think the picture you're seeing is you had this pop in hiring in the late springtime.
That seems to be kind of fading now into a more stable pattern of low but pretty steady private hiring. As you mentioned, the unemployment rate did tick down again, which was good. On the other hand, that occurred alongside yet another decline in the participation rate. That has been declining quite a bit recently, a full percentage point since the beginning of the year. So that was a little disappointing. And then finally, we had another surprise in the average hourly earnings number which was up barely one-tenth of a percent. And on a year ago basis, wage growth now cooled down to 3.2 percent.

**Lauren Brice** (1:48)
Okay. So the signal versus noise question feels particularly live this month. When we look at the claims data we got this week, which were remarkably low whilst ADP came in at its softest in months, you've consistently taken trend signal from ADP even though the month-to-month number can be pretty noisy.
How do you reconcile these two different messages in the context of the data we have in hand this morning as well?

**Mike Feroli** (2:13)
Well, certainly this month, the ADP was on the right side of consensus in terms of flagging a softer number.
An ADP relates to private hiring, right? Actually, pretty not too far from that 30,000 number I mentioned earlier. I don't think it's all that inconsistent, though, with what you're seeing in the jobless claims numbers, because when you look at the details of the household survey, what you see is actually, even though hiring is not that boomy, you're not really seeing much indication of layoff activity. You didn't have permanent job losers among the unemployed went down. But I think all that is consistent with this environment in which hiring doesn't look all that boomy, but at the same time, you're not seeing a lot of layoff activity or other signs of businesses contracting.

**Lauren Brice** (3:01)
Okay. And then when we look at leisure and hospitality specifically, which has been distorted for the last couple of months, running from the Memorial Day calendar shift, you flagged July as the month the sector should normalize back to trend, but we did not see that today. How does this inform your reach on the broader picture for service sector hiring?

**Mike Feroli** (3:22)
Yeah. So as you mentioned, we had a decline of about, or alluded to, we had a decline of 40,000 in July. We don't think that was necessarily distorted by calendar issues.
Nor do, for that matter, do we think there was much of a big World Cup effect in terms of leisure and hospitality employment. So this just looks like a bit of a disappointment, a genuine disappointment. We'll get retail sales next week, so it will be interesting to see whether that decline in hiring corresponded with maybe a pullback in spending for things like restaurants and bars and so forth.

**Lauren Brice** (4:00)
Okay, and then if we look at government employment, which has been a source of noise recently, a sharp jump in local government in May before fading in June, which was tied partly to poll workers. We saw a significant miss today with government hiring down roughly 50,000.
When do we get a cleaner rate on whether federal workforce reductions are producing a more durable drag?

**Mike Feroli** (4:22)
Yes, I think in terms of federal employment, that's been a little steadier since, at least since late last year when you had all the deferred resignations show up.