Payroll picture mixed Payroll picture mixed\images\insights\article\jobs-office-interview-small.jpg July 7 2023 July 7 2023

Payroll picture mixed

But strong enough for the Fed to hike yet again.

Published July 7 2023

Bottom Line 

For the first time in 15 months, June’s employment report was weaker than expected, with sizable downward revisions for April and May. But household employment rebounded strongly in June from a loss in May, wage inflation was hotter than expected, average hours worked rose, and the unemployment rate slipped to 3.6%. In addition, yesterday’s scorching ADP private payroll report for June was more than double what was expected, with a blowout gain of nearly a half million new jobs. With all these figures in mind, we expect the Federal Reserve to hike interest rates by another quarter point (to a target range of 5.25-5.50%) at its policy-setting meeting on July 26. 

Softer-than-expected headline Nonfarm payrolls rose by 209,000 jobs in June (consensus was 230,000). In addition, April and May numbers were revised lower by a combined 110,000 jobs. Private payrolls in June also were weaker than expected, rising by 149,000 jobs (consensus was  200,000). April and May also were revised downward by a combined 98,000 jobs. In sharp contrast, ADP private hiring surged by a much stronger-than-expected 497,000 jobs in June, more than double the consensus estimate for an increase of 225,000 jobs.

Details were hot Household employment (the metric on which the unemployment rate, or U-3, is calculated) rebounded strongly in June, adding 273,000 jobs, up from a loss of 310,000 jobs in May. That helped to push U-3 down from 3.7% to 3.6%. Weekly hours worked increased a tick to 34.4, and average hourly earnings rose more than expected for the second consecutive month, to a month-over-month (m/m) gain of 0.4% and a year-over-year (y/y) increase of 4.4%. 

Fed’s pause no longer refreshes After eschewing a hike at its June meeting, we expect the Fed to raise rates by a quarter point on July 26. To be sure, next week’s CPI retail inflation print for June will be important. But over the past year, headline inflation has declined at a much more rapid pace than core inflation (the Fed’s primary focus), a trend we expect to continue. Moreover, July’s nonfarm payrolls usually enjoy a positive seasonal adjustment, and August payrolls tend to be the wonkiest of the year. The Fed may well remain vigilant and hawkish. 

Important labor market indicators were mixed: 

  • ADP private payroll survey surged by a much stronger-than-expected 497,000 jobs in June, paced by a powerful gain in leisure & hospitality hiring. That’s more than double consensus expectations for a gain of 225,000 jobs and well above May’s downwardly revised increase of 267,000 jobs. This was the ADP’s largest monthly gain since an increase of 551,000 jobs in February 2022. One word of caution, however, is that a distorted seasonal adjustment may have contributed. Also, wage growth rose 6.4% y/y in June for job stayers and by 11.2% for those who changed jobs. 
  • Initial weekly jobless claims have risen 37% over the past five months to reach 265,000 during the June survey week, their highest level since October 2021. 
  • Challenger job cuts rose in May by 40,700 layoffs, up 25% from a year ago. But that is half of May’s level, marking the smallest number of layoffs since last October. Cuts total 458,000 this year, the worst first half since 2020. Technology, health care, retail and financial layoffs collectively account for more than half of the terminations. 
  • Lagging Job Openings & Labor Turnover Survey (JOLTS) declined by 4.8% m/m in May to 9.8 million job openings, down 18% from a record 12 million job openings in March 2022. There are now 1.6 job openings for every unemployed worker. 

Wage inflation and hours worked rise For the third consecutive month, average hourly earnings ticked up to a stronger-than-expected gain of 0.4% m/m in June (which annualizes to 4.8%), and a stronger-than-expected 4.4% y/y in June (consensus at 4.2%). In addition, average weekly hours worked rose to 34.4 in June, up from a 3-year low of 34.3 in May, which matches March and April levels. 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 rate falls, labor impairment rises, participation flat Household employment rebounded strongly by 273,000 jobs in June, reversing the loss of 310,000 jobs in May. The number of unemployed people fell by 140,000 in June, much improved from the increase of 440,000 unemployed workers in May. As a result, the U-3 declined to 3.6% in June from 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 is that U-3 will rise to 4.1% by year-end 2023 and to 4.5% by year-end 2024, increases which could push the economy into recession. 

The labor impairment rate (U-6) rose to 6.9% in June, up from 6.7% in May, 6.6% in April and a cycle low (dating back to 1994) of 6.5% in December. The civilian labor force rose by 133,000 in June, marginally above May’s gain of 130,000. That left the labor participation rate unchanged at 62.6% in June for the fourth consecutive month, compared to the pre-pandemic cycle high of 63.4% in February 2020. 

K-shaped recovery continues to widen The unemployment rate for high-wage-earning workers declined to 2% in June from to 2.1% in May, though still above the cycle low of 1.8% in September 2022. But the unemployment rate for low-wage-earning workers leapt to 6% in June, up from 5.7% in May, 5.4% in April and 4.8% in March (versus its 30-year low of 4.3% in February 2022). The personal savings rate has risen from a 17-year low of 2.7% in June 2022 to 4.6% in May 2023 (down sharply from 26.3% in March 2021). 

Sector details mixed: 

  • Private payrolls posted a weaker-than-expected gain of 149,000 jobs in June (consensus at 200,000) versus 259,000 in May, and April and May combined were revised down by 98,000. 
  • Government hiring rose by 60,000 jobs in June (27,000 of which was state hiring and 32,000 local hiring), up from 47,000 in May. 
  • The manufacturing sector gained 7,000 jobs in June (consensus at 5,000), up from a loss of 3,000 jobs in May, compared with a gain of 9,000 jobs in April and a loss of 12,000 jobs in March. The ISM manufacturing index has fallen into contraction territory under 50 in each of the past eight months to 46.0 in June. 
  • Construction added 23,000 jobs in June for the second consecutive month, up from a gain of 11,000 in April and a loss of 9,000 jobs in March. Mortgage rates more than doubled from 3% to 7.35% over the past 18 months, which slowed the housing market significantly. But they have recently eased back toward 7.0%, and the housing market has rebounded. 
  • Temporary hiring (an important leading indicator of employment trends) has shed jobs in four of the past five months, losing 13,000 workers in June, compared with a gain of 3,000 jobs in May and losses of 21,000 jobs in April, 3,000 in March and 10,000 in February. 
  • Retail lost jobs for the third time in the past four months, shedding 11,000 jobs in June after adding 23,000 jobs in May and losing 2,000 jobs in April and 19,000 jobs in March. That compared with healthy gains of 48,000 in February, 22,000 in January and 27,000 in December. The important spring “Mapril” season was soft, with retail sales rising by a tepid 1.7% y/y. 
  • Leisure & hospitality added only 21,000 jobs in June, compared with 26,000 jobs in May and 11,000 in April. That compares with stronger hiring trends of 46,000 in March, 57,000 in February, and 99,000 in January.

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Tags Markets/Economy . Equity .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

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