The July employment report was a definitive blockbuster, adding 528k jobs vs. expectations of only 260k. As usual job gains were widespread across industries.
The labor market has now recovered all of the jobs lost in March and April of 2020, although it did take 27 months to do so. Note that no new jobs have been created since April 2020, they have just been re-created, and the level of jobs is still well below where it would have been if it had stayed on the pre-pandemic trend.
Virtually all industries are now near pre-pandemic levels. The most notable gain was in Transportation and Warehousing which is now up 247% from April 2020 – think Amazon. Utilities is a very small sector so its 34% decline is relatively unimportant to the economy as a whole. Also note that government jobs, and leisure and hospitality jobs, have yet to recover.
The unemployment rate fell 0.1% to a 50-year low of 3.5%.
Wages grew 0.5% m/m, substantially higher than expectations of 0.3%. As a result, wages are growing 5.2% y/y, the same as last month. However, of course, after inflation takes its toll, real wages are tumbling at a -3.9% y/y rate. Since real consumption accounts for 70% of all economic activity, the fact that the fuel for consumption, real wages, is falling does not bode well for the future.
Since the report is so strong on headline job growth and continues to show wage inflation, it gives the Fed the “go ahead” for continued rate hikes. In fact, after the report was issued, the probability of a 75 bps hike in September rose to 67% compared to only 34% yesterday. The stock market fell on the news since it implied that the Fed could raise the Fed Funds rate at a faster pace than previously thought. The report adds substantial ammunition to the argument that we are not in a recession.
Previously my headline read, in part, “Labor market cracking.” There’s no denying that this report runs directly contrary to that statement. But there are other measures of the labor market, and they do continue to support that argument.
While the unemployment rate in this report did fall from -0.1% to 3.5%, remember it is a lagging indicator and tells about the state of the economy several months ago. Also, it fell for a bad reason, which is that the labor force participation rate fell from 0.1% to 62.1%. To explain this relationship, note that the unemployment rate is the percentage of people unemployed divided by the labor force (which is the number of people employed and unemployed). The definition of “unemployed” means that you don’t have a job but are looking for one. However, if you don’t have a job and are not looking for one, you are not counted as “unemployed,” you are counted as “not participating” in the labor force. So if the labor force falls, the unemployment rate goes up. Here’s a simple example:
Unemployed = 2
Employed = 98
Labor force = 100
Unemployment rate = unemployed/labor force = 2/100 = 2%
Now suppose those participating in the labor force fall
from 100 to 50. Then:
Unemployment rate = unemployed/labor force = 2/50 = 4%
That is what has happened over the past 32 months since before Covid (December 2019). The table below shows that over that time period while the population grew by 3,831,000, the labor force actually fell by -673,000. As a result, those not participating in the labor force increased by 4,502,000, and the labor force participation rate fell by -1.2%. This is all going the wrong way.
Another labor department report called the Job Openings and Labor Turnover Survey (JOLTS) also pointed to deterioration in the labor market. The chart on the left shows the number of job openings represented by the blue line and the number of hirings represented by the tan columns. There is still a huge gap between the two which will continue to pressure wages. But the number of openings appears to have peaked in March and has fallen 10% since then. In addition, the number of hirings has fallen for four straight months. The actual gap is shown on the second chart indicating that it has shrunken rapidly, falling 17% in four months. So employers are offering fewer jobs, hiring fewer people, and the gap is closing, all indicating a cooling in the labor market.
Weekly jobless claims lead the economy when they bottom out as shown in the first chart. Last week they rose again to the highest level (ex-Covid) in over four years. They are now up 49% from April’s bottom.
Separately, job openings on the Indeed website as compared to early February 2020, just before Covid, are shown below. Total postings have fallen from the 64% high at the beginning of this year to 54% currently. New postings have fallen precipitously from the high of 90% in February this year to 63% currently.
More employment measures can be found in the Institute of Supply Management ISM (ISM) survey. The employment component of both the manufacturing and services surveys is just under 50, signaling a slowdown in hiring, just like in the JOLTS survey.
There was some other noteworthy detail in the ISM surveys. Manufacturing appears to be sliding. New orders are in contractionary territory at 48.0, and while back orders are still expanding (they are above 50), they are expanding at an ever-slower rate (the green line is going down). The second chart also shows a cooling. Supplier deliveries are still getting slower but at an improving pace. As a result pricing pressures, while still increasing, are doing so at a slower pace.
The ISM services survey, covering 80% of the economy, still shows strength with new orders at 59.9 and backlogs are 58.3. Like in the manufacturing survey, vendor deliveries are still getting worse but at a slower rate, and pricing pressures (which are enormous at 72.3) are still increasing but at a slower rate.
Other recent reports were mixed.
New orders for durable goods up a brisk 2.0% m/m to 11.0% y/y. While that is down from recent highs, it is still a blisteringly hot pace compared to the long-term average of only 2.8%. A sub-component, which is considered a proxy for business spending, gained +0.3% m/m. The resulting 8.6% y/y growth rate is over 3 times as much as the 2.7% long-term average.
Residential construction fell by -1.6% m/m, the first loss since May of 2020, just after Covid arrived.
The 10yr-2yr yield curve has been inverted for a full calendar month, but the 10yr-3mo3 curve remains positive.
The July employment report was a dramatic upside surprise, in fact, it was so strong that it now makes a 75 bps hike in September more likely than not – once again slamming the brakes on the economy. Despite the strength in the employment report, there are still several other indicators that point to a cooling labor market. In addition, according to the ISM surveys, manufacturing is in contraction, but services remain quite strong. The surveys also showed improvements in the rate of vendor delays and pricing pressures.
The debate over whether or not we are currently in a recession continues. However, the evidence we are looking at suggests that the real concern is for a recession in 2023.
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