June jobs report a mixed bag
Fed on track for a 0.75% hike in late July.
Nonfarm payrolls rose by a stronger-than-expected 372,000 jobs in June, much better than Bloomberg’s estimated consensus gain of 265,000. That suggests the risk of an imminent recession is probably overstated. But May and April were revised down by a combined 74,000 jobs (to 384,000 and 368,000, respectively), which erased nearly 70% of today’s upside surprise. Compared with February’s strong gain of 714,000 nonfarm jobs, the average of 375,000 new jobs created over the past three months is running at about half speed, so the labor market is clearly decelerating from its first-quarter peak.
Moreover, the household survey lost 315,000 jobs in June (versus a gain of 321,000 jobs in May), marking the second time in the past three months this metric has declined. That drove the critically important labor participation rate down for the second time in the past three months. At 62.2% in June, it is well below its pre-pandemic peak of 63.4%. The unemployment rate remained at 3.6%, where it has sat in each of the past four months, although wage inflation continues to moderate to a year-on-year (y/y) increase of 5.1% in June from 5.6% in March.
Fed on tap for another 75 in July Scheduled for release next week, the nominal Consumer Price Index (CPI) for June is expected to have risen 8.8% y/y versus 8.6% in May. In conjunction with this morning’s relatively solid jobs report, we expect the Federal Reserve to execute at least one more 75-basis-point hike in the fed funds target range when it meets July 27. The Fed is shrinking its bloated $9 trillion balance sheet by $47.5 billion in each of June, July, and August ($30 billion in Treasuries and $17.5 billion in mortgage-backed securities, or MBS). In September, policymakers expect to accelerate that pace to $95 billion monthly ($60 billion in Treasuries and $35 billion in MBS). Their longer-term plan is to pare holdings by a third over the next three years, absent a recession.
Key inflection point This brings us to the Fed’s annual monetary policy symposium at Jackson Hole, Wyo. in late August. If inflation peaks in June or July from 40-year highs, the Fed could signal it will downshift to half-point hikes starting in September. But if inflation remains hot, officials may stay aggressive. That uncertainty, combined with a potentially challenging second-quarter reporting season that kicks off next week, should keep financial markets on edge.
JOLTS, Challenger & claims soften, ADP taking a break Aside from today’s mixed jobs report, there are several other metrics that collectively point to a slowing labor market:
- Lagging Job Openings & Labor Turnover Survey (JOLTS) has slipped 5% over the past two months, from 11.86 million job openings in March to 11.25 million in May. There are still 1.9 job openings for every unemployed worker. Voluntary quits and their rate eased to 4.3 million workers and 2.8%.
- Challenger job cuts surged in June by 57% from May and by 59% from a year ago.
- Initial weekly jobless claims have risen 42% over the past 15 weeks, and the smoother 4-week moving average is up 36% over the past three months.
- ADP private payroll survey has 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 jobs in February. Small company hiring, an important engine of growth for the U.S., has now lost jobs for four consecutive months.
Wage inflation continues to slow Annual wage gains declined to 5.1% in June from 5.6% in March. Weekly hours worked in June were unchanged at 34.5 for the second consecutive month, down from 34.7 hours in February.
Unemployment rate flat, while labor impairment & participation rates fall The household survey lost 315,000 jobs in June (versus a gain of 321,000 workers in May), declining for the second time in the past three months. The number of unemployed people fell by 38,000 in June (versus a gain of 9,000 in May), marking the fourth decline in the last five months. The unemployment rate (U-3) was unchanged for the fourth consecutive month at a cycle low of 3.6% in June, slightly higher than the pre-pandemic, half-century low of 3.5% in February 2020. The labor impairment rate (U-6) plunged to a new record low (dating back to 1994) of 6.7% in June. The civilian labor force declined for the second time in the past three months, losing 353,000 jobs in June (versus a gain of 330,000 workers in May). That drove the participation rate down a tick to 62.2% in June for the second time in the past three months, compared with 62.4% in March and from the pre-pandemic cycle high of 63.4% in February 2020.
K-shaped recovery deteriorates Highly skilled workers saw their rate of unemployment rise a tick to 2.1% in June from 2% in each of the three previous months. But the unemployment rate for low-wage workers leapt to 5.8% in June from 5.2% in May, well above its 30-year low of 4.3% in February.
Sector details soft The manufacturing sector added a better-than-expected 29,000 jobs in June (consensus estimate at 21,000), stronger than the gain of 18,000 jobs in May but well below 61,000 new jobs in April, 58,000 hires in March and 50,000 in February. Construction added a tepid 13,000 jobs in June, down from a gain of 34,000 jobs in May, but better than the loss of 5,000 jobs in April. Mortgage rates have doubled to 6% in the first half of this year, pressuring construction. Retail hiring rebounded by 15,000 jobs in June, as stores prepare for the important Back-to-School season, after shedding 44,000 jobs in May and 23,000 jobs in March, which sandwiched no new hires in April.
Temporary hiring, a leading indicator of employment trends, added only 5,000 jobs in June versus a downwardly revised gain of 11,000 workers in May and a loss of 11,000 jobs in April. Leisure & hospitality has slowed considerably over the past eight months, adding only 67,000 new jobs in June, versus downwardly revised gains of 68,000 (down from 84,000) in May and 59,000 (down from 83,000) in April. That compares with more robust hiring of 104,000 in March, 124,000 in February, 138,000 in January, 186,000 in December and 191,000 in November. This slowdown in leisure & hospitality hiring has negatively impacted low-wage workers, whose unemployment rate has surged 1.5% in recent months.