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Economic & Housing Weekly Note

Labor Market Conditions Cool Amid Weak Manufacturing Activity and Tightening Lending Conditions

August 4, 2023

Key Takeaways:

  • Nonfarm payroll employment increased by 187,000 in July, while the May and June reports were revised downward by a combined 49,000 jobs, according to the Bureau of Labor Statistics (BLS). The healthcare industry grew by 63,000 jobs and leisure and hospitality employment grew by 17,000. Temporary help services continued a general decline, shedding 22,000 jobs. The unemployment rate ticked down one-tenth to 3.5 percent and the labor force participation rate was unchanged at 62.6 percent. Average hourly earnings rose 0.4 percent for the second consecutive month, up 4.4 percent from a year-ago.
  • The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 34,000 in June after a downward revision to May, according to the BLS. The quits rate declined two-tenths to 2.4 percent, reversing last month’s gain and returning to only one-tenth above the pre-pandemic level. Layoffs and discharges were relatively flat at 1.5 million, approximately 300,000 below the average 2019 level.
  • Nonfarm business productivity increased at a 3.7 percent annualized rate in 2023 Q2, the fastest rate since 2020, according to the BLS. Unit labor costs rose 1.6 percent annualized, two-tenths below the average gain in 2019.
  • The ISM Manufacturing Index increased four-tenths to 46.4 in July. Improvements included the new orders index, which rose 1.7 points to 47.3, and the production index, which was up 1.6 points to 48.3. The employment index dropped 3.7 points to 44.4, its lowest level in three years. Supply chain conditions continued to show improvement with both the supplier deliveries and the non-seasonally adjusted prices paid indices remaining well below the expansionary threshold of 50.
  • The ISM Services Index declined 1.2 points to 52.7 in July. The business activity index declined 2.1 points to 57.1 and the new orders index was down 0.5 points to 55.0. The prices paid index rose 2.7 points to 56.8, though that’s still near a three-year low and is below the 2019 average.
  • Light vehicle sales rose 0.6 percent to a seasonally adjusted annualized rate of 16.0 million in July, according to Autodata. The figure remains around 1.0 to 1.5 million vehicles below the typical pre-pandemic sales rate.
  • The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS), for the three months ending in July, reported a net tightening of residential mortgage loans across all major mortgage categories as well as weaker demand for all residential mortgage types. Approximately half of respondents reported tightening standards for commercial and industrial (C&I) loans and more than two-thirds reported tightening standards for commercial real estate (CRE) loans.
  • Private residential construction spending increased 0.9 percent in June, its second consecutive monthly gain, according to the Census Bureau. Sending on single-family construction rose 2.1 percent, while multifamily construction spending was up 1.5 percent. Spending on improvements declined 0.6 percent after a 5.2 percent jump in May.
Forecast Impact:

Employment growth continued to modestly decelerate in July, largely in line with our expectations. After revisions, job gains have now been under the 200,000 mark for two consecutive months, a sign that the labor market may be normalizing. We believe further softening in labor market conditions may be ahead, as employment in the temporary help services industry, which typically leads broader employment trends, continues to decline. Still, the absolute rate of job growth remains solid, and wage growth remains at a level that is likely inconsistent with the Fed’s 2 percent inflation target, indicating in our view that an ongoing restrictive monetary policy stance is likely.

The ISM manufacturing index remained at or near recessionary territory in July, though we’re discounting this somewhat as hard measures of manufacturing activity report that the sector is weak but not contracting as rapidly as the survey suggests. Still, the decline in the ISM services index continues to suggest a general decelerating trend in the economy. Combined, we think these surveys are consistent with headwinds slowing economic growth in the near term. These headwinds include tightening lending standards, which were evident in this quarter’s SLOOS. Additionally, vehicle sales look to have stabilized around the 16 million annualized mark, which is still well below pre-pandemic levels. While supply chain issues continue to impact some auto brands, the slow sales rate is likely also due in part to higher interest rates weighing on demand. Considering both economic and labor data, we continue to believe economic activity is likely to slow significantly by the end of the year despite the economy’s remarkable resilience in recent quarters.

Nathaniel Drake
Economic and Strategic Research Group
August 4, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.