Non-Farm Payrolls Beats Expectations, Internals Show Strength in Services

Non-Farm Payrolls for July printed at 163,000 jobs added on economist expectations of a 100,000 jobs added print. The range of estimates was very wide, with economists expecting anywhere from 50,000 to 165,000 jobs. Also, the unemployment rate ticked up to 8.3 percent on expectations of a 8.2 percent rate. The data shows that the economy may be rebounding from a slowdown in the second quarter.

The employment report was highlighted by strength in service-sector jobs. Goods-producing jobs, including manufacturing and construction jobs, only added 24,000 jobs. Contrarily, the service sector added 148,000 jobs. Professional and technical services jobs, including computer systems and legal services, added 49,000 jobs and health care added 19,000 jobs.

Markets continued earlier gains, as U.S. equity futures climbed to pre-market highs. The uptick in the unemployment rate indicates that layoffs still occurred despite job gains, showing that there is still adjustment being made in the labor market since certain industries collapsed beginning in 2007. The hardest part about deciphering the employment reports in 2012 has been the effects of seasonal adjustments, which have added or subtracted hundreds of thousands of jobs per month. It appears as though seasonal adjustments added some 377,000 jobs and that the unemployment rate was 0.3 percent higher when measured on a non-seasonally adjusted basis.

The report may crimp expectations of further Federal Reserve easing, as the stronger than expected report shows that the economy may be improving from the slowdown seen in the second quarter. Economists point to the slowdown in Europe as the root for at least some, if not most of, the slowdown domestically. Recent data has shown that Europe may be bottoming, and with data in China showing similar patterns, there may be credence to the argument that the U.S. economy may be bottoming.

However, the Fed could still be forced to act to drive down the unemployment rate. Part of its mandate is to maintain full employment, and with the unemployment rate above 8 percent, the Fed may act to drive it down. Many people left the labor force following the Great Recession, and this pattern is now reversing. Although the labor force participation rate declined in July, the unemployment rate ticked higher as not many people left full-time jobs for part-time jobs.

What is of note in the report is the continued disparity between college graduates and high school graduates. The unemployment rate for those with a bachelor's degree or more was constant at 4.1 percent. However, for those with only a high school diploma, the unemployment rate was higher to 8.7 percent from 8.4 percent. This gives credence to the theory that companies are truly looking for applicants with a better educational background and more work experience.