Misunderstood employment situation
Nonfarm payroll employment declined 42,000 in July after an upwardly revised decline of 93,000 in June and an upwardly revised rise of 41,000 in May. Many market participants interpreted the roughly 50,000 in upward revisions as a sign that economic activity was bottoming out. But the new figures don't really change things, reflecting continued declines in factory payrolls. Moreover, the service sector is showing a sharp deterioration, adding 138,000 jobs in May, 33,000 in June but a mere 5,000 in July. This is a disturbing trend - not one that reveals an improving labor market despite the upward revisions to previous months. The trend in construction - previously one area of strength - is also deteriorating.

The civilian unemployment rate remained unchanged in July at 4.5 percent as both employment and the labor force grew in excess of 400,000 for the month. But don't let that enormous job gain throw you off. Between February and June more than one million jobs were lost. The jobless rate from the Household Survey and nonfarm payroll from the Establishment Survey are at odds from time to time. This is one of those times. But an increase in jobs of 447,000 after a loss of more than one million, during the summer months when figures are often distorted by teens entering the labor force in droves, can't be viewed as a sign of improving labor market conditions. (See the Short Take article on August 1 for a further discussion of the differences between the Household and Establishment surveys.)

Average hourly earnings rose only 0.3 percent in July, less than the 0.5 percent gain recorded in June. However, this put the yearly rise at 4.4 percent, the largest year-on-year rise since April 1998. Given that policymakers are more concerned about economic activity these days, and do believe that inflationary pressures are quiescent, it is unlikely that the earnings rise will prevent Fed officials from reducing the federal funds rate target at the next FOMC meeting later in August.

NAPM surveys deteriorate in July
The NAPM surveys for both the manufacturing and non-manufacturing sectors weakened in July. The purchasing managers' index for manufacturing dipped to 43.6 from a level of 44.7. We are splitting hairs to even note the greater deterioration since any level below 50 percent means that the manufacturing sector is contracting. July 2000 was the last time the manufacturing index was above 50 percent.

Financial market players were spooked further on Friday when the non-manufacturing index fell below 50 percent for the third time in four months. This suggests that the service sector is contracting as well. Indeed, it goes along with the three month deterioration in service- producing nonfarm payrolls as noted above.

Total factory orders "improve" but information technology worsens
Factory orders fell 2.4 percent in June, more than reversing the prior month's gain. Total new orders fell at an annualized rate of 6.3 percent in the second quarter, an improvement from the whopping 15.6 percent drop in the first quarter. But not all sectors behaved in a similar fashion. While new orders of nondefense capital goods declined slightly more slowly than the previous quarter, new orders for information technology goods plunged at a 43.4 percent rate in the second quarter on top of the first quarter's 24.4 percent decline! It is no wonder that factory payrolls continue to fall given the weakness in new orders. Until new orders turn around, manufacturing employment will remain in the negative column.