Good news is bad news
Hot July jobs report keeps Fed on warpath against inflation.
Nonfarm payrolls were shockingly much stronger than expected in July, soaring by a 5-month high of 528,000 jobs, more than double the Bloomberg consensus gain of 250,000. The unemployment rate (U-3) fell to 3.5%, matching its pre-pandemic, 52-year cycle low achieved in February 2020. The most negative aspect of the report is that the labor participation rate declined for the third consecutive month, to 62.1%, well below the pre-pandemic peak of 63.4%. Average hourly earnings leapt by a much stronger-than-expected 0.5% month-over-month in July (annualizes to 6%), while the 5.2% year-over-year rate for wage growth was higher than expected.
Collectively, this suggests the U.S. is not in recession, inflation is still a problem and the Federal Reserve needs to continue to hike rates aggressively, imperiling growth estimates for both GDP and corporate profits. The equity market’s view, that inflation already peaked and the Fed will land an immaculate pivot to rate cuts early next year, is premature. Stocks have surged nearly 15% over the past seven weeks, and trading could be choppy over the next few months as investors cash in some of their recent gains. In contrast, bond investors widened the critically important two- to 10-year yield curve inversion to 40 basis points, suggesting the risk of recession next year is rising. If so, an equity correction may be brewing.
Solid job gains Adding to the strength, May and June’s nonfarm payrolls reports were revised higher by a combined 28,000 jobs. Private payrolls were similarly strong last month with a gain of 471,000, more than double the consensus of 230,000. The household survey rebounded with a gain of 179,000 jobs in July, up from June’s loss of 315,000. The 3.5% unemployment rate matches the pre-pandemic, half-century low in February 2020.
Other data less sanguine The household survey gained 179,000 jobs in July (up from a loss of 315,000 jobs in June), though this measure has declined twice in the past four months. The number of unemployed people fell by 242,000 in July (versus a decline of 38,000 in June) marking the fifth decline in the last six months. The labor impairment rate (U-6) was unchanged at its record low (dating back to 1994) of 6.7% in July. But the civilian labor force declined for the third time in the past four months in July, losing 63,000 jobs (versus a loss of 353,000 jobs in June). That drove the participation rate down another tick to 62.1% in July, compared with 62.4% in March and the pre-pandemic cycle high of 63.4% in February 2020.
Other metrics point to a slowing labor market:
- The Job Openings & Labor Turnover Survey (JOLTS) has declined 10% over the past three months, from 11.86 million job openings in March to a 9-month low of 10.7 million in June. There are now 1.8 job openings for every unemployed worker. Voluntary quits and their rate eased to 4.2 million workers and 2.8%, respectively.
- Challenger job cuts have risen 36% in July from a year ago.
- Initial weekly jobless claims have risen 57% over the past four months to an 8-month high of 260,000.
- ADP private payroll survey halted its publication in June and July to revise its methodology. But its last report in May was a huge miss at a much weaker-than-expected, 2-year low of only 128,000 jobs, down 79% from a gain of 601,000 in February. Small company hiring, an important engine of growth for the U.S., lost jobs for four consecutive months.
Fed on tap for another 75 We expect the Fed to execute another 75-basis-point rate hike on Sept. 21. Next week’s CPI inflation report also will be important, with retail inflation perched at a 41-year high of 9.1%, in the wake of this morning’s torrid 5.2% wage growth. So if inflation remains hot, the Fed may stay aggressive longer, looking further ahead to its November and December policy-setting meetings. Today’s jobs report was the last before the Fed’s annual monetary policy symposium at Jackson Hole, Wyo., in late August.
K-shaped recovery widens High-wage workers saw their rate of unemployment tick back down to 2% in July. But the unemployment rate for low-wage workers rose a tick to 5.9%, well above its 30-year low of 4.3% in February.
Seasonality concerns Our research friends at TrendMacro point out that without seasonal adjustments, nonfarm payrolls lost 385,000 jobs in July, which constitutes a swing of 913,000 jobs from the seasonal gain of 528,000 that was reported. August tends to be the quirkiest month of the year for the labor market, so we may not get any clarity until after Labor Day.
Sector details solid The manufacturing sector added a better-than-expected 30,000 jobs in July (consensus estimate at 20,000), stronger than gains of 27,000 in June and 18,000 in May, but well below 61,000 new hires in April. Construction added 32,000 jobs in July, double 16,000 jobs in June and back on track with May’s 35,000 jobs, and much better than the loss of 5,000 jobs in April. After doubling to 6% in the first half of this year, mortgage rates eased in July. Back-to-school retail hiring rebounded by 22,000 jobs in each of June and July, after shedding 44,000 jobs in May and 23,000 jobs in March, sandwiched by no new hires in April.
Temporary hiring, a leading indicator of employment trends, added 10,000 jobs in July, more than double 4,000 new jobs in June and 5,000 workers in May and well above a loss of 11,000 jobs in April. Leisure & hospitality perked up in July, adding 96,000 new jobs, well above an average of 67,000 new hires in June, May and April. But that’s still well below more robust hiring of 124,000 in February, 138,000 in January, 186,000 in December and 191,000 in November. The slowdown has negatively impacted low-wage workers, whose unemployment rate has surged 1.6% over the past five months.