Employment data hasn’t been this good since the days of the iPod

It’s all relative. At first glance, the 157,000 jobs added in July might appear weak. Indeed, the headline nonfarm payrolls print fell short of expectations of a 195,000 jobs gain and well short of the 268,000 jobs and 248,000 jobs added in April and May, respectively.

However, looking at the broader picture, the economy has continued to add 200,000 jobs on a monthly basis over the past year, and these jobs number continue to reduce the amount of slack in the labor market.

{mosads}The unemployment rate fell 0.1 percentage points to 3.9 percent in July, while the underemployment rate (the U-6 rate), which accounts for discouraged workers and part-timers wanting full-time position, reached a 17-year low of 7.5 percent.

This is even more encouraging since the labor force participation rate remained steady close to its cycle high, at 62.9 percent, while wage growth was unchanged at a moderate 2.7 percent, year-over-year.

Overall, the Fed will likely take this “not too hot, not too cold” jobs report as a sign that the economy remains strong and that further gradual rate hikes are warranted. Another two rate hikes should be expected before the end of the year.

Buoyant job creation despite long cycle and trade tensions

The U.S. economy has now added jobs for 94 consecutive months — the longest stretch on record — with more than 1.5 million jobs already added since the start of the year! As such, while the 157,000 payrolls advance in July fell short of expectations, it should be considered as a strong report.

The employment trend remains quite firm, with a monthly average of 224,000 jobs added over the last three months and an impressive 12-month trailing average of 200,000 jobs per month. The economy is on track to add nearly 2.5 million jobs in 2018, which would represent the eighth-consecutive year the economy has added more than 2 million jobs.

The jobs details in July were encouraging overall, with manufacturing payroll rising 37,000 and showing no clear signs of disruptions (yet) from the rising trade tensions between the U.S. and its major trading partners.

On the services side, job growth was also positive, with restaurants and bars hiring strongly, many summer jobs and retail activity being solid (despite a drop in sporting and hobby stores hiring).

One restraining factor for headline payrolls came from lower local education employment (down 14,000), but this was mostly due seasonal factors as some teachers paid on a 10-month basis temporarily rolled off the payrolls.

Last time unemployment was this low, iPods were the new cool thing

The unemployment rate fell to 3.9 percent in July, approaching May’s record low of 3.8 percent (tied for the lowest rate since January 1970). But, perhaps more importantly, the U-6 unemployment rate fell 0.3 percentage points to 7.5 percent. The last time, underemployment was this low in the U.S. economy, Apple was releasing the iPod — remember those?

At this stage in the business cycle, it is very encouraging to continue to see unemployment falling further. Based on recent unemployment claims, labor turnover data and job growth, it appears there is still room to further reduction in labor-market slack. It wouldn’t at all be surprising to see the unemployment rate push toward 3.7 percent by year-end.

Labor force participation is rising (if you peek behind the curtain)

These unemployment rate readings are even more encouraging in the context of stable labor force participation (LFP). In July, the LFP rate held steady at 62.9 percent, near the top of its four-year range of 62.6-63.1 percent.

While sideways movement in the LFP rate may appear disappointing at first glance, it’s very impressive when you consider the strong structural drag from aging demographics. With the first baby boomers having started to retire in 2011, the cyclical labor force participation boost has been masked by the structural demographic drag.

While the official LFP rate is marginally higher than in January 2014 (62.9 percent versus 62.8 percent), an age-adjusted measure shows the rate is up 1.2 percentage points!

Looking into the details, the age-adjusted labor force participation rate is only 0.8 percentage points below its pre-recession level, compared with a 3.2 percentage-points shortfall for the official statistic. In other words, labor market dynamics remain very favorable.

Wage growth is firming (slowly), but inflation is rising faster

Hourly earnings rose as expected, up 0.3 percent in July, leaving the pace of annual wage growth unchanged at 2.7 percent. While this is certainly not disappointing, it isn’t worthy of excessive excitement either. Overall, wage growth remains fairly moderate despite record-low unemployment and vast anecdotal evidence of worker shortages.

Looking ahead, it may be that hourly earnings are underestimating the true pace of wage growth. The Employment Cost Index (which accounts for compositional shifts in the labor force) grew 2.8 percent, year-over-year, in the second quarter, while the private wages and salaries component rose 2.95 percent — a 10-year high!

Further, for the wonks out there, the Bureau of Labor Statistics will release updated establishment data later this month, which will be reflective of the strong upward revisions to household income data from the latest National Income and Product Account revisions. This could potentially see upward revisions to historical wage growth momentum.

Whether wage growth picks up in the coming months will be essential in determining the future path of the economy. Indeed, with inflation currently accelerating faster than wage growth, households may feel an increasing pinch on their wallets unless they see stronger pay raises. This could represent a headwind for consumer outlays and economic momentum.

Gregory Daco is the chief economist at Oxford Economics.