INDICATOR: July Employment Report

KEY DATA: Payrolls: Up 163,000; Private Sector: Up 172,000: Unemployment Rate: 8.3 percent (Up 0.1 percentage point)

IN A NUTSHELL: “Firms are hiring more workers, but it’s the unemployment rate that most people look at and the increase cannot help confidence.”

WHAT IT MEANS: With the recovery being less than hoped for, we look to each “Employment Friday” to tell us whether economic conditions are improving. The July jobs report showed that firms seem to be hiring more, as the payroll gain was much greater than expected. I had been arguing all week that the underlying data were pointing to job gains of at least 150,000, and we exceeded that level.

The numbers would have been even better if the cutbacks in education hadn’t continued. Outside the public-education sector though, the job situation brightened quite a bit. Just about every sector posted increases.

Interestingly, except for lots of new waiters and waitresses, there were few outsized gains that you can look at and scratch your head. Nonresidential construction posted a huge decline, while the vehicle sector, which didn’t shut down for as long as it usually does, added more than expected. But that was it.

As far as income goes, wages and hours worked rose a little, pointing to some, but not great, income gains.

While the payroll side of the report was solid, the rise in the unemployment rate was discouraging. The details are really confounding as a decline in the labor force, which occurred, usually leads to a rate decline as the unemployed tend to drop out. In this case, the number employed fell even more, so it is hard to really get a handle on what is going on with this part of the report.

MARKETS AND FED POLICY IMPLICATIONS: This report was neither fish nor fowl. Indeed, politicians will be able to spin this in so many directions that a gyroscope would give up.

Looking at it as an economist, my view is that the gains in payrolls are most important. This is a consumer-driven economy, and that requires income growth. We can be sure that businesses are not going to suddenly start increasing wages and salaries, so we need to see more people on payrolls if the income fuel tank is to be filled.

The July pace of hiring is sustainable. It may not be great, but it should stabilize the unemployment rate and maybe even lead to a tick downward once in a while. Continued job increases at the July level would allow the economy to expand at a moderate pace, but unless the gains accelerate, the pace would not be anything spectacular.

Unfortunately, the other factor that drives spending is confidence, and any rise in the unemployment rate is likely to lead to more uncertainty about the future. That doesn’t bode well for spending.

Nevertheless, a surprise to the upside on jobs could propel the markets higher and investors might feel a little better about conditions, at least in the United States.

This report gives the Federal Reserve more breathing room, which the members are looking for since I doubt the Federal Open Market Committee really wants to use up one of its last bullets doing something to stimulate the economy.