A Chilly July for Labor, Manufacturing

The jobs report and ISM index for the month left investors disappointed about prospects for two key sectors of the economy

Two eagerly awaited economic data updates for July released on Aug. 1 -- the Labor Dept.'s employment report and the manufacturing index from the Institute for Supply Management -- left investors disappointed about prospects for recovery in those two key sectors of the economy.

In the jobs report, non-farm payrolls declined 44,000 in July, with a net downward revision to the June level. This was much worse than expected, with weakness broad-based across most industries. Goods-based employment fell 67,000, led by another hefty drop of 71,000 in manufacturing. Private-Service employment fell 4,000 on widespread weakness outside of Business Services.

And Government payrolls fell another 10,000, as the current budgetary strain felt by all levels of government continues to prompt cost-cutting layoffs.

In fact, the only encouraging piece of news in the payroll series was that temporary employment gained another 42,000, and is now up 122,000 over the last three months. This marks the best three-month stretch since late 1999, which is encouraging given that this hiring usually leads normal hiring. Another big disappointment in the report was the workweek, which dropped to a new all-time low (back to 1964) of 33.6 hours from 33.7 hours.

But taking some of the sting out of these unfavorable components of the report was a drop in the unemployment rate back to 6.2% from June's spike to 6.4%, while hourly earnings rose a respectable 0.3%. Overall, while employment tends to lag activity, and activity only now appears to be picking-up, the market was clearly hoping for a more upbeat report.

Meanwhile, the headline reading on the ISM release -- which edged up to 51.8 in July from 49.8 in June -- was disappointing in the wake of the much larger-than-expected jump in the Chicago PMI on July 30. The result does little to change the view that activity in the sector is finally beginning to pick up following disappointing growth in the first half of the year.

Anecdotal comments in the report support this view, as "...many industries have hit bottom and are either coming back or have at least stopped declining." Twelve out of 20 industries reported growth. And the report notes that the July reading of 51.8 has historically corresponded with a GDP gain of 3.3%. In addition, inventory sentiment is sitting at some of the best levels since last September.

Overall, the outlook for strong second-half growth remains encouraging.

From MMS International analysts

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