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Despite the economic slowdown, job creation remains strong

August 5, 2022 Blog 2 min read
Jim Baird Wealth Management
Recession chatter has increased considerably in recent months, but the July jobs report sent a message: the rumors of the expansion’s demise may still be premature.

Nonfarm payrolls & Unemployment rate history chart

The U.S. jobs machine continued to hum in July, creating 528,000 jobs during the month, pushing the unemployment rate down to 3.5%. Upward revisions to the preceding months’ totals chipped in an additional 28,000 jobs to that total. Job gains were broad-based, cutting across the service, manufacturing, construction, and government sectors.

The report symbolically completes the return of the labor market to its pre-pandemic form, lifting total payrolls modestly above their February 2020 peak while matching the lowest unemployment rate in over 50 years. The number of unemployed workers also declined to 5.7 million, in line with its low point in the last cycle.

The labor economy has been a significant bright spot for the economy for much of the year, showing surprising strength as other data pointed to an economy that was faltering. Against two consecutive quarters of contracting GDP, positive job creation of any magnitude might seem surprising, but the report of average job creation of 437,000 over the past three months has to raise some eyebrows.

In part, the divergence between job market strength and weak GDP points to the significant impact that inflation is having on economic data. Nominal GDP growth remains solid — enough to keep workers busy and employers wary of trimming payrolls extensively despite the slowdown in real growth. Given the extreme hiring challenges experienced by employers in the past year, it’s possible that many will want to see the proverbial “whites of the eyes” of any recession before they cut workers. 

Despite the relative robustness of the establishment survey, the household component of the report provides a more guarded view, with a relatively muted increase of 179,000 employed individuals in July following a decline of over 300,000 in June. The divergence in the two surveys can be telling, particularly at turning points in the economic cycle. On net, the number of employed individuals reported by households has decreased since May, standing in stark contrast to the establishment data. How that divergence is resolved in the coming months will be indicative of the true underlying strength and direction of the labor economy. 

Unemployment is still low, consistent with a relative scarce supply of unemployed workers, and job creation remains robust. That hasn’t changed. What has started to change is the demand side, as the number of job openings has fallen back from record levels in April. To be clear, the demand for workers is still considerable; the 1.2 million decline in job openings in recent months doesn’t change that. Even so, it appears increasingly likely that peak demand has passed. The reduction in job postings, coupled with a notable increase in first-time jobless claims, points to a labor market that’s cooling and is consistent with the slowdown in the economy. 

The bottom line? Some cracks may be showing in the labor market’s foundation in the form of rising layoffs and lower job openings, but they’re still not enough to create real weakness in the labor economy. Job creation remains strong — perhaps surprisingly so given the GDP data. The slowdown in the economy is real, but for now at least, it appears that the job market didn’t get the memo.

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Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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