Employers created a solid 255,000 new jobs in July, the second best monthly performance this year and the headline unemployment rate held steady at 4.9 percent. However, the labor market is but one aspect of an extremely large and multifaceted U.S. economy. Jim O'Connell takes a look at other factors such as personal consumption, Fed rates and GDP to provide a holistic look at the August 5 jobs report in this blog.

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Employment Report: Jobs-GDP Tug-of-War

Fri Aug 5, 2016

Employers created a solid 255,000 new jobs in July, the government announced August 5, the second best monthly performance this year, as the headline unemployment rate held steady at 4.9 percent.

Job growth has averaged 190,000 per month over the past three months and 186,000 since January—impressive by any measure and indicative of powerful momentum in the U.S. labor market.

The nation’s unemployment rate has hovered between 4.7 percent and 5.1 percent since October 2015, essentially “full employment,” an extraordinary drop from the Great Recession peak of 10 percent posted in October 2009. And since January 2010 the U.S. economy has added just under 15 million new jobs.

Meanwhile, wages, previously a blotch on the jobs picture, appear to be perking up at last. Average hourly earnings rose year over year by 2.6 percent, according to the Bureau of Labor Statistics.

Stock markets welcomed the jobs news, driving the Dow Jones Industrial Average up over 150 points at mid-morning Friday and sending the S&P 500 to an intraday record of 2,180. Investors seem to be betting on a “Goldilocks” jobs effect: hot enough to keep the economy going but not too hot to force the Federal Reserve to hike interest rates.

Jobs-GDP Tug-of-War
Amid all these positive signals on jobs, it’s worth keeping in mind that the labor market is but one aspect of an extremely large and multifaceted U.S. economy. Contrary to the jobs reports, government data on gross domestic product (GDP) are clearly sending strongly negative signals.

The Commerce Department announced in late July that GDP grew at a seasonally adjusted annual rate of only 1.2 percent in the second quarter. This follows a growth rate of just 0.8 percent in the first quarter of 2016. The U.S. economic engine is obviously sputtering.

While personal consumption expenditures moved ahead at a 4.2 percent annual clip in the second quarter, business investment in plant, equipment and inventories actually declined at a 9.7 percent annual rate, the third consecutive negative quarter.

Taken together the jobs and GDP data are contradictory. The economy cannot sustain new jobs without strong economic growth. Hence the tug-of-war: sooner or later either job growth will stall amid a weakening economy or the economic engine will rev up and accelerate job creation.

Right now it’s anybody’s guess which data series will prevail. We can take a cue from the Federal Reserve: if it doesn’t raise interest rates soon it suggests Fed governors see weak GDP winning the tug-of-war and want to open the monetary spigots to maintain full employment. If the Fed raises rates this year it expects job expansion to ultimately escalate GDP growth.

In any event, strong job growth and weak GDP growth cannot coexist. Sooner or later, as the 2003 Jack Nicholson-Diane Keaton romantic comedy film title says, “Something’s Gotta Give.”