Job creation slowed in June
The Fed has been advocating hard for looser labor market conditions since last year. While there’s still a long way to go to reach the Fed’s forecasts for unemployment, the June jobs report indicated that the Fed’s tightening efforts and diminished tailwind from fiscal stimulus are having the desired effect. That doesn’t mean that the Fed is done though.
The June unemployment rate was little changed from the prior month, pulling back to 3.6%. Joblessness has vacillated very little since March 2022, holding steady in a narrow 3.4–3.7% range over that period. Unemployment is only one indication of the state of the labor market, but one that the Fed has specifically pointed to as a means of communicating what policymakers believe will be needed to bring inflation back under control. Fed policymakers pared back their year-end unemployment forecast considerably in June from 4.5 to 4.1%, but the limited movement in the jobless rate alone would suggest limited progress toward the goal of cooling labor markets.
The real news lay elsewhere in today’s report.
Job creation came at the weaker end of expectations, as nonfarm payrolls rose by 209,000 in June. However, significant downward revisions to the April and May numbers slashed 110,000 off previously reported monthly increases. The net increase of just 99,000 was unexpectedly weak, lowering the three-month average to 244,000 from a previously reported 283,000 for the three-month period ending in May.
On a standalone basis, the single-month increase of 209,000 was lower than expected, but still decent — certainly nothing that should alone sound the alarm bell. Still, it comes in a month in which hiring tends to be relatively strong, reflecting a seasonal influx of teenage workers seeking summer employment. Through that lens, the result appears a bit weaker. Coupled with sharp downward revisions to the prior two months, and it appears that the long-awaited cracks in the labor market are becoming increasingly visible.
Also of note was the fact that the relative weakness was most notable in the service sector, which had been leading the way after a slower rebound in the early stages of the recovery. The recent loss of momentum was widespread across industries, with outright declines in several.
Temporary help service workers declined in June for the second time in three months and declined by over 30,000 over that period. Those workers may represent a small portion of the overall workforce but are often among the first cut by employers who are experiencing a slowdown in demand. The loss of temp service workers can be the proverbial canary in the coal mine for the labor markets and will be watched closely in the coming months for further indications of what might yet to come more broadly.
Wage growth eased only fractionally last month but has been in a steady downward trend since peaking near 6% year-on-year in March 2022. That’s still a brisk pace relative to the decade leading up to 2020, when it topped out around 3.5% in the late stages of the expansion. It’s good news for workers, perhaps, but it’s both a reflection of and a contributor to elevated inflation. Larger paychecks may put a smile on workers faces temporarily, until those extra dollars flow right back out the door to pay for more highly priced goods and services.
For the Fed, the report seems unlikely to change much in the near term. Despite the slowdown in the pace of job creation, it’s still too strong for the unemployment rate to drift higher absent a large — and unexpected — influx of individuals into the workforce. Going into the report, the Fed was expected to raise its policy rate by another quarter-point later this month; coming out of the report, that’s still the case.
The bottom line? The jobs market isn’t nearly as brisk as it was over the past few years, but even the sharp slowdown in job creation hasn’t been enough to push the unemployment rate meaningfully higher — a key ingredient to the Fed’s recipe to bring inflation back down to its 2.0% target. The “long and variable lag” in monetary policy notwithstanding, there’s not yet been enough evidence in the hard data to convince policymakers that enough has been done to arrest inflation.
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