Economic Commentary

Economic Commentary

August 4, 2023

Solid July jobs report a potential blow to soft landing scenario

Executive summary

U.S. payrolls in July added 187,000 jobs, narrowly below the consensus expectations of 200,000 – the second straight miss in roughly a year and a half. It was coupled with downward revisions to the prior two months, pulling the six-month average down to 222,500. Still, that’s about 60,000 above the pre-pandemic 3-year average.

Yet, the unemployment rate ticked down to 3.5% in July, which is corroborated by other labor figures, such as weekly jobless claims. More importantly, wage gains aren’t cooling nearly as quickly as inflation pressures, including goods prices.

This is a solid jobs report on its face; if the year was 2019 – we would be cheering. The so-called soft landing is self-defeating – the stronger the economy remains ultimately translates into higher interest rates for longer as the Federal Reserve (Fed) attempts to stabilize prices (aka curb inflation). At the very least, the Fed will need to hold rates, though it’s still possible additional rate hikes will be needed given continued resilience. But let’s not put the cart before the horse – there’s a lot more data ahead before the Fed meeting in late September. 

A review of major industry trends

Private payrolls increased by 172,000, while government payrolls added 15,000, the fewest in seven months. Service-providing industries added 154,000 workers, while goods producers chipped in 18,000 workers.

Information lost 12,000 workers, which is directly related to the twin Hollywood strikes (the writer and actor strikes that are roughly in their second and third month, respectively). The impacts of these work stoppages are spilling into support areas for non-union staff.

Within professional & business services, employment services lost 34,400 in July. The bulk were in temporary help services, which shed 22,100 workers in July and has declined in eight of the past nine months, cutting 169,000 workers in total. This is a red flag insofar as fewer temporary workers are generally a sign of weakness and vice versa. Thus, excluding employment services, professional & business services hired 26,100 workers.

Within manufacturing, nondurables manufacturers – such as food, apparel, and packaging – shed workers for the fifth month in a row, losing 38,000 workers over that span. Meanwhile, durable goods manufacturers – think autos, furniture, and appliances – have added 35,000 during the same period.

Education cut 7,000 in July, the first decline in seven months. All the job losses were state-level public schools, which sliced 20,000 positions and are categorized within government, while local public school payrolls were unchanged. Otherwise, private education services added 14,000 in July and governments added 35,000 non-educational positions.

The remaining major industries largely maintained their current trends. 

Unemployment rate dipped again, but hours worked fell and wages increased

The unemployment rate fell by 0.1% for the second consecutive month to 3.5% in July. That’s just above the cycle low of 3.4%, which was also the lowest level since May 1969. However, the broader underemployment rate (U-6) also fell in July, to 6.7% from 6.9%.

Hours worked—officially known as average weekly hours worked for all employees—ticked down to 34.3, which is below the trailing 12-month average of 34.5 but is in-line with the pre-pandemic 10-year average. Within manufacturing, hours worked held steady at 40.1 for the fourth straight month, while overtime hours stayed at 3.0 for the seventh month in a row. Both remain roughly in-line with their respective long-term averages.

Average hourly earnings rose 0.4% month over month in July, which is slightly higher than previously reported (as May and April were revised higher). The annual pace increased 4.4% from a year ago as it continued to steadily decline from the 2022 peak of 5.9%. Despite the recent cooling, it remains well above the pre-pandemic 10-year average of 2.4%.

The pace of average hourly earnings for rank & file workers—officially known as production & nonsupervisory employees—rose 0.5% during July, the largest increase in eight months. That bumped the annual pace up to 4.8%, significantly above its pre-pandemic rate of 3.2%. This is important since production & nonsupervisory employees are the bulk of all employees and where most of the dramatic post-pandemic wage gains have been concentrated.

Our take

It’s hard to categorize this as anything but a solid jobs report, which may frustrate those looking for considerably more weakness within labor markets. While it is cooler than the very strong pace of the past few years, it isn’t slow by any measure. The six-month average is still running 60,000 above the pre-pandemic 3-year average (177,000). The unemployment rate is hovering near a 50-year low. Wages are still growing at nearly double the pre-pandemic 10-year average and their monthly pace is quickening, not cooling.

Indeed, this provides more data for those seeking a so-called soft landing of the U.S. economy. Yet, it also undercuts the soft landing thesis – that the economy is resilient enough to avoid a recession.

In our view, a soft landing looks like a negative quarter or two of gross domestic product (GDP), but without job losses. There has never been a recession without job losses, but there have been periods with job losses and no recession (including 2019, 1997, 1996, 1995, 1993, etc.).  A soft landing is possible, but not probable at this point.

While we don’t anticipate a sudden collapse in economic activity and don’t view the economy as weak currently, most of the incoming economic data isn’t strengthening. Regardless, it’s certainly not as strong as many of the soft landing bulls are projecting.

It would be unprecedented to avoid a recession with weakening leading indicators, higher interest rates, and tighter financial and credit conditions. Many of the leading indicators are pointing downward and have been for more than a year. For example, the latest manufacturing data weakened and has been contracting for nine months. Moreover, the ISM Services Index cooled in July, but prices rose to a three-month high.

Inflation isn’t quite behaving like it should, which is to say not cooling broadly enough, and is now being pressured once gain by crude oil prices. Additionally, real gross domestic income (GDI), which is an alternate measure of economic health, has been negative on a year-over-year basis for three straight quarters, which has never occurred outside recessions in the last seven decades. In fact, the U.S. has never had more than one negative quarter of GDI without a recession. And that’s before student loan payments are restarting for 46 million people in the fourth quarter. In our opinion, that’s going to take a LOT of wind out of the economy.

Accordingly, we are beginning to view a soft landing scenario as self-defeating – the stronger the economy remains ultimately translates into higher interest rates for longer as the Fed attempts to stabilize prices. While it’s clearly cooler than the blistering pace of ’21 and ’22, inflation remains well above anyone’s comfort level. At the very least, the Fed will need to maintain rates, though it’s still possible additional rate hikes will be needed to curb inflation given continued resilience of the overall economy. And we didn’t even get into the discussion of what parts of the economy will buckle under higher interest rates for an extended period.  For example, commercial real estate appears particularly vulnerable.

But let’s not put the cart before the horse – there’s a lot more data ahead before the Fed meeting in late September; two more months of pretty much every key labor and inflation report.

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