Labor market stagflation?
Payroll growth slows, but wages stay hot.
July’s employment report was weaker than expected, the second straight monthly downside surprise after 14 consecutive months of upside beats. May and June nonfarm job gains were downwardly revised, too. But wage inflation was hotter than expected, household employment remained strong and the rates for both unemployment and labor impairment declined to 3.5% and 6.7%, respectively.
Softer-than-expected headline Nonfarm payrolls rose by a softer-than-estimated 187,000 jobs in July (consensus at 200,000), and May and June gains were revised lower by a combined 49,000 jobs. Private payrolls were also weaker than expected, rising by 172,000 jobs in July (consensus at 180,000), while May and June were revised down by a combined 25,000 jobs.
Federated Hermes was estimating a better-than-expected nonfarm payroll gain of 320,000 jobs, due to a sequential decline in Challenger layoffs for the third time in the last four months, a 5-month low in initial weekly jobless claims and a much stronger-than-expected surge of 324,000 private hires in the ADP survey. Part of today’s discrepancy may be that ADP reported an outsized gain of 201,000 leisure & hospitality workers in July, while this morning’s establishment survey reported a more muted increase of only 17,000 workers in this category. So, which is it?
In addition, the Commerce Department typically revises July results higher (much like the month of January) due to seasonal adjustments. Nonfarm payrolls declined by 819,000 in July on a non-seasonally adjusted basis, but Commerce revised them up to a reported gain of 187,000 jobs this morning due to a positive seasonal adjustment of 1.006 million jobs. So, today’s report was clearly noisy.
Whither Jackson Hole? After hiking interest rates a quarter point (to a target range of 5.25% to 5.50%) at its last policy-setting meeting on July 26, the Federal Reserve likely will reflect on this week’s noisy jobs data at its annual monetary policy symposium in Jackson Hole, Wyo., in late August. Fortunately, the Fed will see two more CPI retail inflation reports and another jobs report ahead of its next policy-setting meeting on Sept. 20. While the Fed may take a vigilant and hawkish tack at Jackson Hole, another quarter-point hike in September (or on Nov. 1) probably remains a data-dependent decision.
Important labor-market indicators were strong:
- ADP private payroll survey July was hotter than expected, surging by a much stronger 324,000 jobs (consensus at 190,000), nearly two-thirds of which was leisure & hospitality hiring. True, that’s below June’s overall outsized gain of a downwardly revised 455,000, but June was goosed by a distorted seasonal adjustment. Also, wage growth rose by a super-hot 6.2% y/y in July for job stayers and by 10.2% for those who changed jobs.
- Initial weekly jobless claims This high-frequency leading employment indicator fell by nearly 17% over the past month to 221,000 claims for the week ended July 22, a 5-month low.
- Challenger job cuts July’s 23,700 layoffs were the smallest since August 2022. The sequential 17,000 decline in layoffs was down a sharp 42% from June and 8% from a year ago, marking the third monthly decline in layoffs over the past four months.
- Lagging Job Openings & Labor Turnover Survey (JOLTS) Job openings declined marginally in June to 9.582 million, their lowest level since mid-2021, from 9.616 million in May. But that’s still down 20% from a record 12 million job openings in March 2022. There are now 1.6 job openings for every unemployed worker, and 3.77 million voluntary quitters in June represents a decline in the quit rate to a cycle low of 2.4%.
Wage inflation rises and hours worked declines This category is the poster child for labor-market stagflation. For the third time in the last four months, average hourly earnings ticked up to a stronger-than-expected gain of 0.4% m/m in July (which annualizes to 4.8%), and a stronger-than-expected 4.4% y/y increase in July (consensus at 4.2%). In addition, average weekly hours worked ticked down for the second time in the past three months to a 3-year low of 34.3 in July. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy.
Unemployment and labor impairment rates fall, participation flat Household employment added a solid 268,000 jobs in July, compared with a gain of 273,000 jobs in June and a loss of 310,000 jobs in May. The number of unemployed people fell for the fourth time in the last five months in July by 116,000 workers, compared with a decline of 140,000 in June. As a result, the official rate of unemployment (U-3) declined to 3.5% in July, down from 3.6% in June and 3.7% in May, although still above April’s 53-year low of 3.4%. But the Fed’s own forecast from its June Summary of Economic Projections (SEP) is that the unemployment rate will rise to 4.1% by year-end 2023 and to 4.5% by year-end 2024. So, unemployment is moving in the wrong direction, which is likely to be a topic of discussion at Jackson Hole later this month.
The labor impairment rate (U-6) declined to 6.7% in July from 6.9% in June, but that’s still above the cycle low (dating back to 1994) of 6.5% in December. The civilian labor force rose by 152,000 workers in July, up from 133,000 in June and 130,000 in May. That left the participation rate unchanged at 62.6% in June for the fifth consecutive month, compared to the pre-pandemic cycle high of 63.4% in February 2020.
K-shaped recovery narrows The unemployment rate for highly educated workers remained steady at 2.0% in July, though still above September 2022’s cycle low of 1.8%. But the unemployment rate for low-skilled workers improved sharply to 5.2% in July from 6.0% in June (though still well above its 30-year low of 4.3% in February 2022). This may be due to ADP’s reported surge in leisure & hospitality hiring last month.
Sector details soft:
- Government hiring rose by 15,000 jobs in July (paced by 19,000 local hires), down from an overall gain of 57,000 workers in May.
- Manufacturing lost 2,000 jobs in July (consensus gain of 5,000), down from a gain of 6,000 jobs in June. The sector lost 4,000 jobs in May and 12,000 in March. The ISM manufacturing index has fallen into contraction territory (below 50) in each of the past nine months to 46.4 in July.
- Construction was strong, adding 19,000 jobs in July, 26,000 in June and 25,000 in May. Although mortgage rates more than doubled from 3% to 7.4% over the past 18 months, there is still enormous pent-up demand for housing.