KEY DATA: Payrolls: +157,000, Private: 170,000; Revisions: +59,000; Unemployment Rate: 3.9% (down from 4.0%; wages: +0.3%/ ISM (NonMan.): -3.4 points; Orders: -6.2 points/ Trade Deficit: $46.3 billion (7.3% wider)

IN A NUTSHELL: “Despite a disappointing jobs number, the labor market remains strong.”

WHAT IT MEANS: It was a big day for data and the numbers were mixed. The July jobs gain was well below expectations but as I always say, don’t assume one employment report is a good indicator of anything. First, the previous two months job increases were revised upward sharply. Taken together, job growth was actually strong. Indeed, the three-month average, which is a better way of looking at the situation, was a robust 224,000. In addition, Toys-R-Us’ closing reduced retail jobs sharply. So, don’t even look at the headline number, especially since the details were really good. Manufacturers and restaurants keep adding workers like crazy and construction and health care are hiring strongly. Government was down, but that was in education, which the government just cannot figure out how to seasonally adjust. On the unemployment side, the rate fell and is likely to continue declining. The labor force grew and the participation rate was stable. The one disturbing number was the wage increase. It was decent, but over the year, the 2.7% gain means that real wages are up less than 1% over the year. That is pathetic.  

NonManufacturing activity slipped pretty sharply in July. The Institute for Supply Management’s index dropped led by major decline in new orders. Backlogs grew a lot less rapidly, which is a concern. Business activity was off significantly and that is something the needs to be watched as it may be the first sign that the bloom is coming off the economy.

The trade deficit widened sharply in June as exports declined while imports rose. The drop in foreign sales was not surprising, given the trade war issues, but not in the categories we saw. Agricultural exports rose but there were sharp declines in capital goods, vehicles and consumer products. That does not bode well for future exports. We also exported more petroleum products. On the import side, we bought a lot more consumer goods, petroleum products and vehicles, but a lot less capital goods.

MARKETS AND FED POLICY IMPLICATIONS: The economy is in very good shape and the labor market is mirroring the gains. The July payroll increase is likely to be revised upward, if the previous months upward revisions are any indicator, and Toys-R-Us is not shutting down again. But wages are just not rising fast enough to improve spending power. The soft July vehicle sales number may be a trend as consumers are becoming tapped out. That does not bode well for future spending. In addition, we may be starting to see that trade wars can create significant negatives for economies. The decline in exports must be watched carefully. And while the Supply Managers’ index drop was just one number, if it is the start of a trend, it could be worrisome. The Fed will not be swayed by the headline jobs number but instead will look at the details. The lack of significant wage pressure is helpful, at least on the inflation front, but the trend in job growth is still above labor force growth and that implies a further tightening in the labor markets. The weak consumer spending power growth and the first crack in the economy that could be indicated by the slowdown in the nonmanufacturing segment may not change policy in the short run. But they are now likely on the Fed members’ radar.