Nonfarm payroll growth in the U.S. beat expectations in July with 164,000 net new jobs added and the unemployment rate remaining unchanged at 3.7%, according to the latest data released by the Bureau of Labor Statistics.
While that figure beat the Econoday consensus estimate of 151,000 jobs, June's numbers were revised downward, with BLS data showing 193,000 jobs were added that month instead of the 224,000 first reported. May's jobs data, which showed a disappointing 75,000 jobs added, was further downgraded to 62,000 jobs.
"In terms of what this means for the Fed, I think it just confirms that the solid fundamentals domestically remain in place and that that should continue to support income growth and in turn consumer spending outlays in the face of global headwinds and in the face of increased trade protectionism," Gregory Daco, chief U.S. economist, Oxford Economics, said in an interview. "From that perspective, this is a reassuring report for the Fed."
Fed Chairman Jerome Powell described the 25 basis point cut — the first the central bank has issued since December 2008 — as a "mid-cycle adjustment" designed to "insure against downside risks" facing the economy, like slower global growth and simmering trade tensions. Powell said after the FOMC's July meeting the Fed would not begin a long series of rate cuts, given that those measures would only be needed if there is apparent economic weakness.
While the domestic and global economy has showed signs of slowing, major negative downside risks have yet to fully materialize. The U.S. economy is not likely in store for the blockbuster job growth it saw in 2018, particularly in the manufacturing sector, as BLS data shows the U.S. is averaging 7,500 manufacturing jobs added per month, falling from the 22,000-per-month average added in 2018. Escalating trade tensions coupled with a slowing of global growth have fueled some of this cooling, and sentiment among manufacturers about the future has soured.
Global manufacturing contracted for the third consecutive month in July. That downturn has spread to additional countries, according to the seasonally adjusted J.P. Morgan Global Manufacturing Purchasing Managers' Index, which reached its lowest level since October 2012 in a new reading published Aug. 1. While countries like China, Japan, the United Kingdom and Germany recorded a contraction, the U.S. and Canadian manufacturing sectors are among those remaining in expansion, despite registering barely above the neutral 50.0 mark.
Global trade woes seem likely only to worsen after President Donald Trump announced Aug. 1 a new 10% tariff on $300 billion of Chinese goods starting Sept. 1. He said he was disappointed that the Federal Reserve did not cut rates further and has called on the Fed to support his trade war by loosening monetary policy.
"Powell very clearly highlighted that trade tensions were one of the key factors in influencing the Fed's increased dovishness," Daco said. "I think while the message was somewhat blurred, there was one person that understood it loud and clear, and that is Trump in saying well if I continue to press hard on [protectionism] then I'm going to get the Fed to cut rates."