US employment growth expected to slow but remain strong in July
US employment growth expected to slow but remain strong in July
U.S. Job Growth Points to Possible Economic Soft-Landing
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The eagerly awaited employment report from the Labor Department is expected to show that U.S. job growth slowed further in July, but still maintained enough momentum to protect the economy from a recession. This is mainly due to the Federal Reserve’s hefty interest rate increases, which have curbed demand. However, the report is also expected to reveal a tight labor market, with unemployment rates near multi-decade lows, although wage growth may have moderated.
Economists who have been forecasting an economic downturn by the end of the year are increasingly convinced that the softer landing scenario envisioned by the Federal Reserve is now a possibility. “There are signs that labor demand is decelerating, but it’s not like it’s fallen off a cliff,” said Sam Bullard, a senior analyst at Wells Fargo. This sentiment is echoed by the consensus of 80 economists surveyed, who predict an increase of 200,000 jobs last month, the lowest gain since December 2020. Nevertheless, this still represents double the number of jobs needed to keep pace with the working-age population.
One contributing factor to the slow job growth is companies holding on to workers after facing challenges in finding labor during the COVID-19 pandemic. In sectors such as leisure and hospitality, employment levels remain below pre-pandemic figures. Additionally, retirements in local government education have increased, leading to a boost in the hiring of teachers and support staff.
Interestingly, extreme weather conditions, such as the heatwaves experienced in July, did not have a significant impact on employment growth. “While the extreme heat may have delayed some construction projects and postponed certain leisure activities, history suggests that heatwaves have little impact on hiring or work hours,” explained Carl Riccadonna, chief economist at BNP Paribas in New York. It seems that inclement weather disruptions are more likely to occur during winter or the hurricane season.
The recent strikes by Hollywood writers and actors also appear to have had no effect on employment growth. The Bureau of Labor Statistics, which compiles the employment report, made no mention of the work stoppage in their July strike report.
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Mixed Signals
The July payrolls report could have surprises in either direction. The ADP’s national employment report, released earlier in the week, indicated strong private hiring. Additionally, the number of first-time applications for state unemployment benefits was much lower in July compared to June. These optimistic indicators were coupled with the fewest layoffs in 11 months, as reported by global outplacement firm Challenger, Gray & Christmas.
However, the measures for employment in the manufacturing and services industries, as indicated by the Institute for Supply Management, showed a slight softening, with companies citing slowing demand and worker shortages. Furthermore, despite the abundance of job openings and positive consumer sentiment about the labor market, the risk to the unemployment rate is still present. In June, there were 1.6 job openings for every unemployed person, a figure that has remained relatively unchanged since May.
Wage Growth and Inflation
Given the continued tightness in the labor market, wages are expected to rise at a moderate pace. Analysts predict a 0.3% increase in average hourly earnings in July, slightly lower than the 0.4% increase recorded in June. This would result in a year-on-year wage growth of 4.2%, down from 4.4% in the previous month. Although these figures still surpass the Federal Reserve’s 2% inflation target, it indicates a gradual reduction in wage pressures going into the third quarter.
The recent data favoring inflation has led many economists to believe that the Federal Reserve’s aggressive interest rate hikes may be coming to an end. “We are not there yet, but we are approaching a Goldilocks economy,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. However, some analysts argue that the Federal Reserve is not finished raising rates, particularly considering its focus on inflation. “The hawks at the Fed may become increasingly uncomfortable with the possibility of reemerging inflation if the labor market remains so tight,” cautioned Veronica Clark, an analyst at Citigroup in New York. She predicts that stronger inflation readings into the fall, combined with a labor market that outperforms the Fed’s forecasts, could lead to rate hikes in November.
Despite the mixed signals and varied predictions, there is cautious optimism that the U.S. economy will experience a soft-landing. The tight labor market, coupled with controlled inflation, indicates a delicate balance that could lead to sustained, but milder, economic growth moving forward.
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