Stagnant incomes are slowing economic growth

INDICATOR: July Employment Report/June Personal Income

KEY DATA: Payrolls: 162,000; Unemployment Rate: 7.4% (down from 7.6%); Real Disposable Personal Income: -0.1%

IN A NUTSHELL: "With incomes going nowhere, it should not be a surprise that the economy is growing modestly and job gains are less than stellar."

WHAT IT MEANS: After ADP came out and said private sector job gains in July were probably around 200,000 and the nation's supply managers indicated that manufacturing was booming we all were bulled up for a strong payroll number. Well, that era of good feeling lasted a day. The July job report was a whole lot less than expected. In addition, the May and June total were revised downward somewhat. Over the past three months, the economy has added 175,000 per month. That is not bad but hardly strong enough to make the argument the economy is in good shape. Gains were not well distributed as only 54.5% of the industries surveyed posted increases. Retail, wholesale and leisure and hospitality were strong, manufacturers managed to eke out a small gain and positions were added in professional services, financial activities. However, construction was down and health care is no longer the job machine it used to be. As for the public sector, the federal and state governments continue to cut positions. There was a sharp increase in local public education that managed to overcome the reductions elsewhere but it is not clear if that will continue. The unemployment rate did decline nicely, but the large drop was partially a rounding issue. Still, down is better than up. As I have said many times, I don't consider the participation rate, which fell, an issue given the longer-term trends at work. Wages were flat, not a positive sign.

Critical to future job growth is income and the June data makes it clear that worker compensation is still lagging. Total disposable (after-tax) personal income, adjusted for inflation, was up only 0.7% between second quarter 2012 and second quarter 2013. It is impossible to get strong growth in a consumer-based economy if personal income gains are this weak.

MARKETS AND FED POLICY IMPLICATIONS: This was a disappointing report even with the decline in the unemployment rate. Job gains are less than we would like to see and while today's report will be revised, it is not clear if those changes will be up or down. With worker income so weak, why should anyone really expect robust job gains? The FOMC was more restrained about the economy this week and the GDP and employment reports support that view. It is assumed the Fed wants to get out of the quantitative easing business but it cannot do it if the economy is not strong enough to withstand the ending of the program. Either that of the Fed feels the program is no longer working, at which point they should simply say that and move on. I assume they think it is having some impact. Thus, I suspect that tapering will not begin in September as the FOMC waits for somewhat better jobs and GDP numbers.