Labour market conditions remain strong despite mixed economic data
|US employment growth rebounded to 528,000 in the July Jobs Report, clearly outpacing the consensus expectation of a cooling labour market amid rising recession fears. June figures were also revised higher by 26,000, but besides the strong headline growth, it was striking how broad-based the recovery in employment was across different sectors. Even housing and manufacturing, which are typically among the hardest hit sectors by tightening financial conditions and weakening global business cycle, recorded job gains. Leisure & Hospitality also accounted for a large share of the new jobs, reflecting that the economy is still recovering from the lingering effects of the pandemic.
In contrast, labor force participation rate declined to 61.1%, signalling still persistent labour shortages. While the latest JOLTs job openings data from June does suggest that the peak labour demand is already behind, the persistent imbalance between demand and supply continues to support wage inflation clearly above levels consistent with Fed’s 2% inflation target.
Average hourly earnings rose by seasonally adjusted 0.47% m/m in July, or nearly 5.8% m/m annualized. Given the 2% inflation target and labour productivity growth averaging slightly above 1% during the 2010s before the pandemic, Fed would prefer wage inflation moderating towards 3%, as was the case in 2018-2019. With Q2 unit labour cost growth still outpacing the rise in prices, wage growth continue to support price inflation at too high levels, which is the most evident in the clear pick-up in core services inflation.
Alternative labour market indicators are slightly less upbeat than the traditional establishment survey, which is used to estimate the non-farm payrolls. Despite this, we see little signs of the economic momentum falling off a cliff. NFIB Small Business indicators of labour shortages eased moderately in July, as 49% of respondents reported not being able to fill their open positions right now. This was slightly down from the recent peak of 51% in May, but still significantly above historical levels. However, hiring plans still remain around spring levels. The household survey used for calculating the unemployment rate registered a three-month average employment gain of only 61,700 during May-July, much weaker than the 437,000 in the establishment survey. The household survey is, however, typically more volatile and the deviation is not unusually large in historical context.
As we pointed in FX Strategy - Expansion, inflation and a strong USD, 9 August, the US GDP has remarkably reached the pre-covid trend even though the persistent drop in labour supply would suggest that the trend path of potential GDP has actually declined. This would suggest that the output gap has turned positive and that Fed needs to continue tightening financial conditions in order to bring aggregate demand to more sustainable level. With inflation expectations still remaining at elevated levels, we suspect Fed will continue hiking until we start to see clear signals of a labour market conditions cooling, which in our view is not yet the case.
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