There's No Mentum like Momentum
by Anirban Basu
July 8, 2022
Over my 9+ years working for Anirban, I’ve made several unsuccessful attempts to use the headline There’s no Mentum like Momentum. Well, Anirban is on vacation, and just like this job market, I can’t be stopped.
U.S. payrolls tacked on another 372,000 jobs in June, fewer than the 384,000 added in May but well above the consensus forecast of +268,000. The unemployment rate remained at 3.6%, which aside from January and February 2020 is the lowest since the 1960s. Payroll employment is now 524,000 jobs (0.3%) short of February 2020 levels. That’s spitting distance, and we’ll probably reach full recovery by Q4 2022.
Okay, exuberant headline and rapid job growth aside, there was some bad news in here. The labor force shrank by 353,000, the labor force participation rate inched down to 62.2% in June, and the employment to population ratio fell by 0.2 percentage points and now stands at 59.9%, its lowest level since February.
Revisions were also less than great; April and May’s payroll employment growth was revised downward by a combined 74,000 jobs, so after adding at least 400,000 jobs in ten straight months (May 2021-February 2022), we’ve now added between 368,000 and 398,000 in four straight months (that’s still a ton of jobs).
Then there’s wage growth, which I’ll file somewhere between bad and good. Average hourly wages kept rising in June, up another $0.10 (+0.3%), which is the slowest increase since February but still a little faster than optimal (at least from an inflationary standpoint, on the micro level higher wages are obviously nice). For context, wage growth averaged about +0.2% per month from 2012 to 2019. Wages for production and nonsupervisory employees, the kind of positions affected by worker scarcity and subject to wage inflation, increased 0.5% in June.
So employers are hiring about as fast as the labor supply will let them, but the labor supply is shrinking (at least in June), and wage growth is slowing but is still a little too high. This isn’t quite what the Fed, who’s raising interest rates in an effort to suppress inflation, wants to see and shouldn’t move the needle on upcoming rate hikes.
What does this mean for the Evil R Word (recession)? Well, it’s still possible that GDP contracted in the second quarter after a -1.6% drop (annual rate) in the first, but that would mean there’s an unprecedented disconnect between the job market and the economy. We’ve added more than 2.7 million jobs through the first half of 2022; if GDP did in fact contract during the first and second quarter, that would mean output per worker absolutely cratered.
Is that possible? Sure, but I’d consider it a surprise, and it would probably mean that either job market or GDP data aren’t reflecting what’s actually happening.
(As an aside, the National Bureau of Economic Research has more complex criteria for a recession than two consecutive quarters of negative GDP growth, and I doubt they’d make the call if the unemployment rate stays under 4%.)
Big picture: we’re still adding jobs at a rapid clip, but the labor supply remains tight. I think the Fed would have preferred slower job growth but an expanding labor force, but today’s release shouldn’t fundamentally change how the Fed (or anyone else) views the economy.
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