Labor Market Continues to Show Strength as Economy Sends Mixed Signals

Key Takeaways:

• Nonfarm payroll employment rose by 528,000 in July, a sharp acceleration in job gains compared to the past four months, according to the Bureau of Labor Statistics (BLS). Jobs in leisure and hospitality increased by 96,000, professional and business services employment was up 89,000, and health care employment increased by 70,000. Residential construction employment, including specialty contractors, rose by 14,100. The labor force participation rate was 62.1 percent, the second consecutive month it declined by one-tenth. The unemployment rate also ticked down a tenth to 3.5 percent, matching its February 2020 level. Average hourly earnings rose 0.5 percent, an acceleration of one-tenth from June and remained at 5.2 percent on an annual basis.
• The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined by 605,000 to 10.7 million in June, the lowest level since September 2021 but still elevated by historical standards, according to the BLS.
• The ISM Manufacturing Index fell 0.2 points to 52.8 in July, its fifth decline this year. The new orders index was down 1.2 points to 48.0, its second consecutive month under 50, while the inventories index climbed 1.3 points to 57.3, its highest level since 1984. Supply chain issues showed some signs of improving, though, as the prices paid index dropped 18.5 points to 60.0, the lowest level since August 2020, and the supplier deliveries index was down 2.1 points to 55.2.
• The ISM Services Index increased 1.4 points to 56.7 in July, breaking a three-month streak of declines. Both the business activity index and the new orders index reached 59.9 following increases of 3.8 and 4.3 points, respectively. Supply chain issues also showed signs of easing in the services sector as the prices paid index was down 7.8 points to 72.3 and the supplier delivers index fell 4.1 points to 57.8.
• Light vehicle sales increased 2.1 percent in July to a seasonally adjusted annualized rate of 13.5 million, according to Autodata. The sales rate remains about 21 percent below the July 2019 level.
• Factory orders rose 2.0 percent in June, the largest monthly gain since January, according to the Census Bureau. Nondurable goods orders were also up 2.0 percent.
• The real goods U.S. trade deficit narrowed by $3.1 billion in June, according to the Census Bureau. Real exports increased 1.3 percent, while real imports were down 0.4 percent, their third straight monthly decline.
• Private residential construction spending declined 1.6 percent in June, according to the Census Bureau. Spending on single-family construction fell 3.1 percent, while multifamily construction spending was up 0.4 percent. Spending on improvements was down 0.3 percent.
• The Federal Reserve Board Senior Loan Officer Opinion survey, for the three months ending in July, reported a net tightening of lending standards for most residential loan types, excluding government and non-jumbo non-GSE-eligible loans. There was a significant drop-off in reported demand for all mortgage types for the fourth consecutive quarter.

Forecast Impact:

The establishment payroll survey came in well above our expectations and continues to signal an extremely hot labor market. While we are likely to upgrade our near-term employment outlook due to this report, there is still a divergence between the establishment and household surveys over the past four months. Since March, the establishment survey has shown roughly 1.7 million new jobs added, while the household survey has reported a net decrease of 168,000. Part of the divergence is a definitional difference: When adjusting the household survey to use the same definition of employment as the establishment survey, total job gains are 722,000, though this is still less than half of the establishment survey reported number. Therefore, we suspect some of these jobs gains may be revised downward in the future, but we believe the labor market is still strong and the Fed will continue tightening.

Other incoming data sent mixed signals about the economy’s near-term outlook. On the positive side, the increase in the ISM services index, particularly to the business activity and new order subcomponents, points to further strength in consumption spending on services in Q3. Factory orders were also modestly above consensus expectations and continued growth in exports could provide another boost to Q3 GDP. Further, the supplier deliveries component of the manufacturing index decelerated significantly, suggesting supply chain issues are starting to ease. However, an improving supply chain outlook is at least partially due to lower demand, as the new orders index remained in contractionary territory for the second consecutive month and the inventories index reached its highest level in nearly four decades. On balance, we believe the incoming data is consistent with our forecast for positive but below trend Q3 2022 GDP growth as tighter monetary policy continues to work its way through the economy.

The significant drop in single-family construction spending is supportive of our forecast for falling residential fixed investment leading the broader economy into a recession in the first half of 2023. Still, with the most recent reading from Freddie Mac’s primary mortgage market survey showing the FRM30 rate below 5 percent for the first time since April, we may see some near-term pick-up in home sales if buyers who were previously sidelined by the sharp increase in mortgage rates decide to reenter the market. Despite this possibility, however, we continue to expect housing activity to slow over the coming quarters.

Nathaniel Drake
Economic and Strategic Research Group
August 5, 2022

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