Impressive. But ...

Photographer: Luke Sharrett/Bloomberg

Yay, Jobs! So Why Isn't the Economy Following?

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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The U.S. job market turned in an impressive performance in July. Now if only the economy would catch up.

The latest jobs report suggests that worries about global growth and Britain's vote to leave the European Union didn't act as much of a drag on hiring in the U.S. Nonfarm payrolls grew by an estimated 255,000 jobs in July, bringing the three-month average to 190,000 -- far more than enough to compensate for natural growth in the labor force. The unemployment rate held steady at a low 4.9 percent, and average hourly earnings rose 8 cents to $25.69, suggesting that demand for workers is gradually translating into higher pay.

QuickTake Monthly U.S. Jobs Report

The broader economy, however, hasn’t kept pace. In aggregate, U.S. private-sector workers earned about 4.3 percent more in July than they did a year earlier, thanks to the combination of expanded employment and increased wages. Yet gross domestic product expanded just 2.4 percent (in nominal dollar terms) over the year through June. Here's how that looks:

Earnings and the Economy
Sources: Bloomberg, Bureau of Labor Statistics

Why the divergence? It's not that workers haven’t been spending the extra income: Consumer expenditures were up 3.7 percent in June from a year earlier (again, in nominal terms). Rather, companies are holding back on investing in everything from computers to new buildings. Private investment declined sharply in the three months through June, and the latest data on capital spending suggest the weakness is likely to persist.

If businesses are confident enough to hire, why aren’t they also putting money into expansion? One explanation is that workers are cheap and spare capacity is plentiful, so companies don’t yet have much incentive to devote funds to new projects. Another, and related, possibility is that with interest rates low and investors chasing higher returns, corporate executives prefer to boost earnings per share by giving money back to shareholders in the form of dividends and stock buybacks.

Whatever the reason, the dearth of investment leaves the economy heavily dependent on consumer spending, which in turn makes continued hiring absolutely crucial to provide the income needed to keep consumption going. Until that changes, each new jobs report will be a potential shocker. It's a predicament that can’t be comforting for officials at the U.S. Federal Reserve, and that could yet deliver some unpleasant surprises before Americans elect a new president in November.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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