- Service industries more dependent on workers than equipment
- Jobless rate held at 4.9% last month as labor force swelled
American employers were optimistic enough in the nation’s economic prospects to hire an unexpectedly large number of workers in July for a second month. So far, the same can’t be said for their inclination to invest in updating their operations.
The 255,000 gain in payrolls exceeded all forecasts of economists surveyed by Bloomberg and followed a 292,000 increase in June, according to Labor Department data Friday. This came on the heels of a disappointingly soft report on gross domestic product last week that showed business spending on buildings and equipment dropped in the second quarter for a third consecutive time.
While such disparity between hiring and investing is probably overstated, it’s also symptomatic of an economy that has been increasingly dependent on services such as health care and retailing that require more workers and less capital. Manufacturing, where new factories and assembly lines are arguably more important than increasing staff, has been hit hard by weak global demand and the plunge in energy investment. Even doubts over the upcoming U.S. presidential election could be a reason not to make long-term commitments.
"Given the amount of global uncertainty, in terms of expansion and growth, it’s a lot less risky to hire,” said Jay Morelock, an economist at FTN Financial in New York. Employing more people “is a lot more nimble, much more flexible than really jumping out and doing a high-capital expenditure."
A measure of the breadth of hiring climbed to 63.7 in July, the highest since February of last year, as employment increased in every major industry except mining and information services. Payrolls advanced at health-care providers, retailers, temporary-help agencies and restaurants. Government agencies also took on 38,000 workers, the most since September 2014, reflecting gains at local schools.
“A lot of businesses have figured out that they can meet customers’ needs not by adding equipment but by adding more people,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. For example, restaurants are finding they need to add more people to serve customers, and their establishments may require more bartenders even though they may not need to add a new bar, he said.
The outlook for consumer spending, the lone bright spot for economic growth last quarter, got a lift with Friday’s report. Hourly earnings rose a more-than-forecast 0.3 percent on average in July from a month earlier, the most since April, to $25.69. The year-over-year increase was 2.6 percent, the same as in June.
Last week, Commerce Department data showed the economy expanded in the second quarter at a 1.2 percent annualized rate, less than half the median projection by economists surveyed by Bloomberg. Household purchases climbed at a 4.2 percent rate, the most since the end of 2014, while business investment -- excluding residential real estate -- was the weakest in two years.
The positive readings on the state of the job market put Standard & Poor’s 500 Index and the Nasdaq Composite Index on pace to close above their all-time highs, while the dollar strengthened and Treasury yields increased. Gold and oil retreated.
The report did come with one caveat. The underemployment rate climbed to 9.7 percent in July from 9.6 percent as many of the people entering the workforce had to settle for part-time jobs. The number of people working part-time for economic reasons rose to 5.94 million from 5.84 million. Also, the number of discouraged Americans, those who stopped looking for work because of bleak prospects, rose to a five-month high of 591,000.
Those are categories tracked by Federal Reserve Chair Janet Yellen and her colleagues who are keeping interest rates low to try to bring more people into the workforce in full-time, well-paying jobs. The report did strengthen the argument for the central bank to raise rates again as early as next month, but it was probably not enough to persuade most officials to drop their wait-and-see strategy.
Job opportunities did bring more people into the workforce. A separate Labor Department survey of households showed the jobless rate held at 4.9 percent. Employment climbed by 420,000, more than making up for the 407,000 increase in the labor force.