Labor Market Gains Remain Robust Despite Growing Evidence of a Slowing Economy

Key Takeaways:

• The minutes from the Federal Open Market Committee’s (FOMC) June 14-15 meeting showed that participants viewed the near-term inflation outlook as having “deteriorated,” causing all but one participant to vote in favor of a 75-basis point hike to the federal funds rate. The minutes also noted that inflation risks were skewed to the upside and that “moving to a restrictive stance of policy was required” to fight inflation. Participants also noted that the Committee would be well-positioned to adjust policy as warranted once the federal funds rate was at or above estimates of its longer-run level later this year.
• Nonfarm payroll employment increased by 372,000 in June, according to the Bureau of Labor Statistics (BLS), though the April and May figures were revised downward by a combined 74,000. Leisure and hospitality employment rose by 67,000 and professional and business services employment was up 74,000. The labor force participation rate was one-tenth lower at 62.2 percent, 1.2 percentage points below the February 2020 level. The unemployment rate was flat at 3.6 percent. Average hourly earnings rose 0.3 percent over the month and were up 5.1 percent on an annual basis, the slowest rate since December 2021.
• The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined by 427,000 in May but remained elevated at 11.3 million, according to the BLS. Still, this is now the second consecutive monthly decline in openings. Quits declined by 57,000 to 4.2 million, also marking a second consecutive decline, though it remains elevated.
• The ISM Manufacturing Index declined 3.1 points to 53.0 in June, its lowest level in two years. The headline decline was due largely to the new orders index falling 5.9 points to 49.2. The supplier deliveries index fell 8.4 points to 57.3, its lowest level since July 2020, and the prices paid index dropped 3.7 points but remained extremely elevated at 78.5.
• The ISM Services Index declined 0.6 points to 55.3. The business activity index increased 1.6 points to 56.1, while the new orders index fell 2.0 points to 55.6. The prices paid index was down 2.0 points to 80.1.
• Factory orders rose 1.6 percent in May, according to the Census Bureau. Nondurable goods orders were up 2.3 percent.
• Light vehicle sales rose 2.9 percent to a seasonally adjusted annualized rate of 13.2 million in June, according to Autodata. Despite the increase, the level of sales remains about 22.8 percent below the 2019 average.
• The real goods U.S. trade deficit widened by $185 million in May, according to the Census Bureau. Real exports declined 1.3 percent, while real imports were down 0.7 percent.
• Private residential construction spending rose 0.2 percent in May, according to the Census Bureau. Spending on both single-family and multifamily construction was essentially flat over the month, while improvements spending increased 0.6 percent.

Forecast Impact:

Considering the revisions to prior months, the June employment report came in approximately in line with our Q2 expectations and is unlikely to significantly change our near-term forecast. Though the pace of hiring has slowed gradually over the past several months and the JOLTS survey has shown a potential easing to overall tightness in the labor market, the primary takeaway from the June employment report is that the labor market remains much stronger than levels typically associated with a recession.

Similarly, the decline in the ISM manufacturing index to a level that is consistent with slowing growth adds to growing evidence that the economy is cooling but is not currently in a recession. Still, the large drop in the supplier deliveries index could be an early sign that supply and demand are beginning to come into balance, which would support our forecast for lower goods prices in the second half of 2022. Further, when compared to manufacturing, the relative strength in the services index supports a continued pivot into services consumption, which should help keep personal consumption growth positive, albeit at a slower growth rate than we had previously forecast. On balance, these readings will not significantly alter our forecast, but they support other previously released data that will likely drive a downgrade to our Q2 expectation.

It's worth noting that data releases and revisions in the weeks since the FOMC’s meeting suggest the economy is actually somewhat weaker than reflected in the minutes. Still, with the June labor report coming in above consensus expectations and wage growth still above normal for production and nonsupervisory employees (up 0.5 percent over the month), we believe the June employment report raises the likelihood of another 75 basis point hike at the Fed’s next meeting.

Nathaniel Drake
Economic and Strategic Research Group
July 8, 2022

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