ANALYSIS: Mixed Signals in Labor Report

The nation’s unemployment rate for July fell to the lowest level since the depths of the Great Recession, but that good news was tempered by a slowdown in job growth, a slight decline in the labor force and a continuing pattern of new hires in lower-paying industries.

Overall, the U.S. economy added a moderate 162,000 net new jobs in July. That was slightly below analysts’ expectations and the smallest payroll increase in four months, even after the government Friday lowered the job gains for June to 188,000 and for May to 176,000.

The weaker employment picture muddles somewhat the outlook for the expected tapering of the Federal Reserve’s monetary stimulus program.

Although most analysts still expect the Fed to reduce its $85-billion-a-month bond purchases at its mid-September meeting, the mixed report will make the job statistics next month all the more crucial in the central bank’s decision.

The fall in the jobless rate, to 7.4 percent from 7.6 percent in June, brought that figure to the lowest since December 2008. The drop was welcome and reflected gains in employment, but there were caveats that made it less rosy than at first blush.

Although more people were working last month compared with June, the ranks of part-time workers who want full-time hours edged higher.

The overall labor force – those employed or looking for jobs – declined slightly, contributing to the lower unemployment rate. And the so-called labor force participation rate – the ratio of the overall labor force to total working-age population – fell to 63.4 percent last month, near a three-decade low.

Mark Vitner, a senior economist at Wells Fargo, saw two sides to the jobs report.

On the one hand, he said, the drop in unemployment reflects how employer layoffs have receded significantly since the recession, a fact that is also borne out by the low level of unemployment claims.

On the other hand, Vitner noted, employers are not adding a lot of jobs, especially better-paying ones.

“If you’re looking for a job, things haven’t improved that much,” he said. “But if you have a job, you feel a little better about the economy.”

The nation’s aging population has led in part to the declining labor participation, but the economy also isn’t creating a lot of good-paying jobs to draw people into the job market. And when jobless people are not actively searching for work, they’re not counted by the government as unemployed.

Fed chairman Ben S. Bernanke has said the jobless rate seemed to understate the extent of the weakness in the labor market. On Friday, another top Fed official, who is a voting member of the policymaking committee, suggested this ambiguous nature in the jobs report.

The employment question for the Fed, in deciding when to taper its bond buying, was whether it should focus primarily on payroll job growth and the unemployment rate, or also look at broader indicators, such as the labor force participation rate, said James Bullard, president of the Federal Reserve Bank of St. Louis.

“If the former, then labor markets have clearly improved since September 2012,” Bullard said in remarks at a conference in Boston. “If the latter, then labor markets may be judged to remain weak, but the criterion for labor-market improvement would be considerably muddied.”

With many workers feeling more confident, consumer spending has continued to increase. Car sales are strong, the housing market is recovering, and more people are frequenting restaurants and stores, all of which have helped drive job growth.

The problem is that more of the new jobs in recent months have been in typically low-wage sectors.

Since the start of the year, about half have been in the retail, temporary-help and hotel-restaurant-leisure industries – all of which, on average, offer significantly less pay and hours. In the first seven months last year, these three industries accounted for less than 30 percent of the new jobs added.

That helps explain why the average workweek in the private sector fell a notch last month, to 34.4 hours, and average hourly earnings edged down 2 cents, to $23.98, after a 10-cent jump in June. In the past 12 months, hourly earnings have risen 1.9 percent, slightly better than the rate of inflation.

There also have been increasing job gains this year in some higher-paying professional services, such as management consulting and financial activities.

But what have been missing are many jobs in solidly middle-income industries, including construction and manufacturing, which combined to net no new jobs in the past three months.

“We’re definitely not producing middle-class jobs at anywhere near the pace of high-tech or low-paying services,” said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto, Calif.

On the whole, however, the employment picture nationally isn’t too bad, Levy said, when you consider how sluggish economic growth has been.

“We’re in this slow recovery,” he said, noting the federal spending cuts under the sequester, a gridlocked Congress and a soft world economy. “The job number is pretty good given the context.”

The government reported this week that the economy barely grew in the fourth quarter of last year and expanded just 1.1 percent in the first quarter. Economic growth picked up in the second quarter to a still-lackluster annualized rate of 1.7 percent.

Analysts expect the momentum to build in the second half of this year, as the drag from the sequester fades and the economy benefits from a recovering housing market and rising stock prices.

But it remains to be seen whether the pace of job growth will rise or remain near July’s disappointing level. Recent reports suggest that manufacturing orders are rising, and construction hiring may have been restrained by the rainy weather.

Government payrolls, meanwhile, have held up fairly well. Last month, local governments added 6,000 net new positions, while state offices trimmed 3,000 and the federal sector cut 2,000 jobs.

At the same time, the sequester spending cuts have forced employees to take furlough days, helping push up the number of involuntary part-time workers recently. Such employees, who work less than 35 hours a week, totaled 8.25 million last month, still almost double the number before the recession began in late 2007.

Moreover, two leading indicators in Friday’s report don’t bode well for the near-term job outlook. The average hours worked in the private sector slipped last month, and the temporary-help industry added only 7,700 jobs in July, half the number of June.

“We’re not in a recession, we’re not deteriorating, but it is just extremely sluggish,” said Heidi Shierholz, a labor economist at the Economic Policy Institute. “We are slogging along.”

Jim Puzzanghera of the Los Angeles Times contributed to this report from Washington.