Jobs Data Shows a Strong Economy Amid Recession Fears
Wages provide reassuring news on inflation, but Fed still on track for more tightening.
Even as worries about the chances of a recession spread among investors, the job market continued to chug along strongly in June, with companies adding more jobs than had been expected.
However, in a piece of good news for inflation-weary investors, the details show flattening out of the upward pressure on wages.
Still, with the economy continuing to add jobs at a strong pace and unemployment at historically low levels, the Federal Reserve is likely to remain very much on track for aggressive interest-rate increases.
“Today's solid job gains show that the economy is still strong, which supports continued Fed tightening,” says Preston Caldwell, Morningstar’s chief U.S. economist.
Although fears about a potential recession caused by the Fed’s rate increases have been spreading, “with employment still growing at a robust pace, economic activity is still likely expanding as of now,” Caldwell says. “We expect continued Fed tightening to bring down the trend of economic growth over the next year, but without the economy seeing a significant recession. Likewise, job growth should slow without seeing massive layoffs. This cooling off of the economy will help the Fed in bringing inflation down.”
The Bureau of Labor Statistics reported that total nonfarm payrolls employment rose by 372,000 in June. The June reading on employment was in line with the trend of recent months, although down from the historically high levels of job growth in 2021 and early 2022.
The unemployment rate remained at 3.6%, having hovered at this level since March.
However, some details of the jobs report contradicted the overall strong picture. The Labor Department’s survey used to calculate the unemployment rate found that there were both fewer people working and fewer looking for jobs.
“The household survey conflicted with nonfarm payrolls and actually reported employment down by 300,000 jobs in June,” Caldwell says. “The household survey is the source of the unemployment rate, labor force participation rate, and so on. The survey that includes nonfarm payrolls asks businesses, whereas the household survey asks people, so they can sometimes give conflicting results.”
Caldwell says that usually, greater weight is given to the nonfarm payrolls report. “But the two surveys have diverged significantly over the past three months, with nonfarm payrolls showing average employment gains of about 400,000, while the household survey has shown average employment declines of about 100,000,” he says. “This should temper our assessment of employment gains slightly.”
When it came to the gains reported in hiring, increases were broad based. Job increases were led by professional and business services, leisure and hospitality, and healthcare.
“The only large industry with significant employment weakness has been retail, where jobs have been flat since February of this year,” Caldwell says. “This makes sense given that real consumer spending on goods has declined slightly over that period, as consumers continue to normalize their spending patterns by shifting back into services.”
“Accordingly, employment in hotels has surged 3% over the past three months, arts and entertainment is up about 2%, and air transportation is up about 3%,” Caldwell notes.
On the wages front, average hourly earnings rose by $0.10, or 0.3%, to $32.08, the Labor Department said. Over the past 12 months, average hourly earnings have increased by 5.1%.
Caldwell notes that over the three months, wage growth has come in at a 4.2% average annualized growth rate. That’s a more subdued pace than during the second half of 2021, when it was running at close to 6%.
“This is a positive sign that inflation isn't getting entrenched in the economy,” he says. “Given the ongoing gains in employment, lower wage growth also signals that labor supply is expanding healthily.”
Overall, Caldwell says, “demand for labor also still looks very strong, with the job vacancy rate still hovering around record levels. However, moderate wage growth shows that employers are not determined to fill these openings at any cost.”
When it comes to Fed policy, the June report doesn’t alter the landscape, Caldwell says. “Although the wage data is encouraging for the inflation threat being contained, today's report provides no reason for the Fed to change course from an expected 75-basis-point hike in the federal-funds rate in its July meeting,” he says.