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Economic & Housing Weekly Note

Wage Growth Continues to Indicate Tight Labor Market as Services Activity and Construction Spending Rise

July 7, 2023

Key Takeaways:

  • Nonfarm payroll employment increased by 209,000 in June, while the April and May reports were revised downward by a combined 110,000 jobs, according to the Bureau of Labor Statistics (BLS). Job gains were more mixed this month than they have been recently, with strong gains in state and local government, health care, social assistance, and construction partially offset by modest job losses in retail trade and transportation and warehousing services. The unemployment rate ticked down one-tenth to 3.6 percent after a surprise jump of three-tenths in May. The labor force participation rate was unchanged at 62.6 percent for the fourth consecutive month. Average hourly earnings rose 0.4 percent, matching increases in the prior two months.
  • The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 496,000 in May, reversing most of April’s upwardly revised gain, according to the BLS. The quits rate rebounded by two-tenths to 2.6 percent after nearly reaching its pre-pandemic level in April. Layoffs and discharges were generally flat at 1.6 million, below the 2019 average of about 1.8 million.
  • The ISM Manufacturing Index declined nine-tenths to 46.0 in June, reaching a new cycle low. While the new orders index rose 3.0 points to 45.6, the production index declined 4.4 points to 46.7, also a cycle low. Both the supplier deliveries index and the non-seasonally adjusted prices paid index remained well below 50, indicating improving supply chains and lower inflationary pressures.
  • The ISM Services Index rose 3.6 points to 53.9 in June, the highest level since February. The business activity index jumped 7.7 points to 59.2, the largest monthly gain since March 2021, and the new orders index was up 2.6 points to 55.5. The prices paid index declined 2.1 points to 54.1, the lowest level since March 2020 and below its 2019 average.
  • Light vehicle sales increased 4.4 percent to a seasonally adjusted annualized rate of 15.8 million, according to Autodata. While vehicle sales have generally trended upward in recent months, the rate remains well below its pre-pandemic average of around 17 million annualized units.
  • The real goods U.S. trade deficit narrowed by $7.0 billion to $89.2 billion in May, according to the Census Bureau. Real exports grew 1.2 percent, while real imports were down 2.3 percent.
  • Private residential construction spending increased 2.2 percent in May, the largest gain since January 2022, though this was due in part to a downward revision to April’s data, according to the Census Bureau. Spending on single-family construction rose 1.7 percent, its first increase in more than a year. Multifamily construction spending ticked down 0.1 percent, while expenditures on improvements jumped 3.4 percent.
Forecast Impact:

Employment growth was a touch below our expectations, though it remains at a healthy level that is above the rate necessary to accommodate population growth. The bigger takeaway in this report is wage growth, which, after averaging 0.3 percent month over month gains from January to March, is now averaging 0.4 percent over the past three months, a slight acceleration. Combined with an increase in the May quits rate in the JOLTS survey, which is also correlated with wage growth, the current labor market likely remains too tight to be consistent with the Fed’s two-percent inflation target, given the current state of low productivity growth. Therefore, we continue to expect a higher-for-longer monetary policy stance from the Fed (including a rate hike at its next meeting) until labor market conditions have clearly cooled.

The ISM surveys were mixed in June, with the services index indicating relatively healthy expansion and the manufacturing survey indicating a recession is imminent. Combined, the two surveys are consistent with economic growth stagnating in the near term, in line with our forecast. Other indicators were generally positive, as light vehicle sales continued on a choppy but generally upward trend and real exports grew, though net trade is still on track to drag on Q2 2023 GDP. Additionally, the decline in imports could indicate softening consumer demand.

The increase in residential construction spending is consistent with recent strength in new housing starts. While we continue to expect a pullback in new home construction later this year, this is predicated on the economy entering a modest recession by year-end. If economic growth continues instead, new home construction is likely to exceed our outlook.

Nathaniel Drake
Economic and Strategic Research Group
July 7, 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.