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Jobs Report Brings Much-Needed Good News

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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The global economy desperately needed some good news. That's what it got in the latest U.S. jobs report.

Ahead of today's release of the U.S. employment report for July, the mood was decidedly gloomy, with economic activity slowing in most other advanced countries, the U.K. facing a real and present danger of an economic recession and the risk of financial instability looming. Last week's disappointing report on U.S. gross domestic product, which showed a decline in business investment threatening to drag down still-buoyant consumer spending, added to the concerns.

The U.S. job market's performance should help dispel some of those concerns. Nonfarm employers added an estimated 255,000 jobs in July, well above consensus expectations of about 180,000. Together with upward revisions of 18,000 jobs to prior months' estimates and June’s strong initial reading, this makes the shockingly low May reading (initially 38,000, ultimately revised to 24,000) look like even more of an anomaly.

The three-month average job gain is now running at about 190,000, suggesting that payroll growth can easily continue in the range of 120,000 to 150,000 in the months ahead  -- ample to compensate for natural growth in the labor force and also bring more people back into the labor force.

The unemployment rate remained unchanged at 4.9 percent, but for a good reason: More people were actively seeking work, a prerequisite for being counted as part of the labor force. The labor-force participation rate edged higher to 62.8 percent -- a sign that people are still willing to come off the sidelines and look for work. This indication of slack in the labor market should relieve some of the pressure on the Federal Reserve to move aggressively on interest rates.

Adding to the robust job creation, the average hourly wage increased by 0.3 percent in July, a bit faster than expected. Together with a slight extension of the average work week, this puts more money in the pockets of U.S. households. This bodes well for consumer spending, which still comprises the most important component of the economy, suggesting that the U.S. is in relatively good shape to resist the growth slowdown afflicting other countries.

To be sure, the job market's performance is not enough to drive the economic takeoff required to meet genuine aspirations, counter alarming inequality and avoid a decline in the country's longer-term growth potential. That will require a greater contribution from the private sector, which in turn needs the government to implement policies -- such as pro-growth infrastructure investment and tax reform, a more expansionary fiscal policy overall, more effective labor retooling and a lot better regional and global policy coordination -- to make such a contribution possible. As is now widely -- and finally -- recognized, this goes far beyond what central banks can deliver on their own.

El-Erian on Central Banks, Divergence, and Investing

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

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net