Bait and switch

Bottom Line 

The labor market looks terrific on the surface. Nonfarm payrolls rose by a stronger-than-expected 206,000 jobs in June (consensus at 190,000), while average hourly earnings growth eased to an in-line increase of 3.9% on a year-over-year (y/y) basis. Meanwhile, the participation rate ticked up to 62.6%, the labor impairment rate was unchanged at 7.4% for the third consecutive month and the construction industry added a solid 27,000 workers, its best showing since March.

But private payrolls posted a disappointing gain of only 136,000 jobs in June (consensus at 160,000), while April and May were revised down by 86,000 jobs. Even worse, nonfarm payrolls were revised down by a combined 111,000 jobs in April and May. So, the adjusted gains for nonfarm and private payroll growth in June were a relatively anemic 95,000 and 50,000 workers, respectively. The nominal difference between nonfarm and private hiring in June was an enormous gain of 70,000 government jobs, with 65,000 of them coming from state and local hiring.

Job growth overstated Although the household survey added 116,000 jobs in June, it has lost jobs in four of the last seven months, averaging a paltry monthly gain of only 3,000 jobs over the first half of 2024. That compares with a much stronger monthly average nonfarm payroll gain of 222,000 jobs over the same period. But according to Piper Sandler, preliminary data from the Quarterly Census of Employment and Wages suggests  2023 payroll growth was likely overstated by 770,000 jobs, or an average of more than 64,000 jobs each month, with the final report out in August. 

Both ISM reports drop into contraction territory The ISM manufacturing index posted a softer than expected 48.5 (consensus at 49.1) versus 48.7 in May. That’s the 19th month out of the last 20 that the index has been below the contraction level of 50. Its employment measure declined to 49.3 (consensus at 50), down from 51.1 in May. Manufacturing has added zero jobs or lost jobs in four of the past five months.

The ISM services index surprisingly plunged to a 4-year low of 48.8 in June (consensus at 52.7), compared with a strong 53.8 in May. Its employment measure similarly plummeted to 46.1 (consensus at 49.5), down from 47.1 in May.

Sahm Rule trigger in view? Another trouble spot in June was the rate of unemployment (U-3), which surprisingly rose to a 32-month high of 4.1%. That triggers renewed focus on the Sahm Rule, which states that if U-3 rises by 0.5% or more on a rolling three-month basis within a year, then the economy typically slows into a recession. 

From a 3.5% average in the first quarter of 2023, unemployment has averaged 4.0% over the past three months. In its June 2024 Summary of Economic Projections, the Federal Reserve forecast a 4.2% rate of unemployment by the end of 2025, but that estimate may prove to be overly optimistic.

More bad news In addition, temporary hiring (an important leading employment indicator) lost jobs for the fifth consecutive month and for the sixteenth time in the last 17 months. Last week, ADP posted a five-month low in private-sector hiring and continuing claims hit their highest level since November 2021. 

Are July and September in play for the Fed? We expect one or two rate cuts this year after the election on November 5. But after last week’s soft labor-market data, some investors are looking at its policy-setting meeting on July 31 and September 18. 

One word of caution is that the labor market tends to experience strong upward seasonal adjustments during the month of July. And August tends to be the wonkiest month of the year, due to plant retooling, school closings, and summer vacations. And then there’s the contentious president election. While these likely will be discussion points during Chair Jerome Powell’s upcoming Humphrey Hawkins testimony before both houses of Congress later this week, we expect the Fed to remain patient and data dependent.

Labor market indicators were mixed:

• ADP private payroll survey It added a surprisingly weaker-than-expected 150,000 jobs in June (consensus at 165,000), a 5-month low, compared with 157,000 jobs in May. Workers who changed jobs last month saw their wages rise by a four-month low of 7.7% year-over-year (y/y), down by more than half from the peak of 16.4% in June 2022. But raises for those who stayed experienced their slowest wage growth in three years in June, with a modest increase of 4.9% y/y, down from a peak of 7.8% in September 2022. 
• Initial weekly jobless claims This leading employment indicator rose modestly to 238,000 for the week ended June 29. For the past year, we’ve noticed an unusual pattern in which claims fall by an average of 6.4% going into the survey week and then rebound by an average of 8.1% in subsequent weeks. This has the effect of goosing the flash report for nonfarm payrolls, which is eventually revised lower. But continuing claims rose to nearly 1.86 million for the week ended June 22, the highest since November 2021.
• Challenger, Gray & Christmas layoffs Employers announced layoffs of 48,786 in June, the lowest number in six months. It was down 23.6% sequentially, though 19.8% higher than a year ago. Layoff announcements were balanced last month, led by about 5,000 workers each in consumer products, warehousing, technology and construction.
• Job Openings & Labor Turnover Survey (JOLTS) May job openings surprisingly rose 2.8% sequentially to 8.14 million, up from a 3-year low of 7.92 million in April, 35% below a record 12.182 million job openings in March 2022. The rate of job openings ticked up to 4.9% in May, compared with a 3-year low of 4.8% in April, down from a record 7.4% two years ago. The ratio of available job openings for every unemployed worker held steady in May at a 3-year low of 1.2, down from a peak of 2.0 in March 2022. The number of voluntary quitters rose slightly to 3.459 million in May, and the quits rate held steady for the fifth consecutive month at a 4-year low of 2.2%. This metric peaked at 3.0% in April 2022. 

Wage inflation eases while hours worked flat Average hourly earnings rose by an in-line 0.3% month-over-month in June and 3.9% y/y, down from 4.1% in May. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked were unchanged at 34.3 in June for the fourth time in the past five months. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to cut hours before they downsize staff. 

The impact of migrant workers More than eight million people have streamed across the southern U.S. border over the past three years, and many of them have taken jobs here, either officially or unofficially. As a result, the number of foreign-born workers (aged 16 years and older) has risen nearly 1.5 million over the past year (a 4.9% increase), with a worker participation rate of 67%. But the number of native-born workers has decreased by almost 400,000 over the past year (a decline of 0.3%), with a much smaller participation rate at 62.1%. This mix shift seems to be reducing wage inflation. 

Unemployment and participation rates rise, labor impairment flat Although household employment (an important leading employment indicator) added 116,000 workers in June, compared with a loss of 408,000 jobs in May, this metric has lost jobs four times in the past seven months. The number of unemployed people increased by 162,000 in June, compared with 157,000 workers in May and 63,000 in April. So, U-3 ticked up to a higher-than-expected 4.1% in June, up from 4.0% in May, 3.9% in April, 3.8% in March and 3.7% in January. It sat at a a 53-year low of 3.4% in April 2023. 

The labor impairment rate was unchanged at 7.4% in June for the third consecutive month, up from 7.3% in March, 7.2% in January, 7.1% in December and 7.0% in November, all well above the cycle low (dating back to 1994) of 6.5% in December 2022. 

The civilian labor force rose by 277,000 workers in June, after declining by 250,000 workers in May. The participation rate ticked up to 62.6% in June. That’s down from a post-pandemic high 62.8% in November 2023, while the pre-pandemic cycle high was 63.3% in February 2020. 

K-shaped recovery gap narrows The unemployment rate of highly educated workers surged to 2.4% in June from 2.1% in May, compared with September 2022’s cycle low of 1.8%. But that of less-educated workers held steady at 5.9% in June. It hit a 31-year low of 4.4% in November 2022. 

Sector details weak: 

• Temporary help (an important leading employment indicator) lost 49,000 jobs in June (the worst result in more than three years) for the fifth consecutive month and the 16th time out of the past 17 months. 
• Manufacturing lost a worse-than-expected 8,000 jobs in June (consensus at 5,000), and May was revised down from a gain of 8,000 jobs to zero. April added 7,000 but lost 6,000 in March and 9,000 in February. 
• Construction was the lone bright spot, adding 27,000 jobs in June, up from a gain of 16,000 in May and a loss of 5,000 in April.
• Retail shed 9,000 jobs in June, as the industry gears up for the important Back-to-School season, which we believe will be soft. That’s down from gains of 7,000 in May and 14,000 in April.
• Leisure & hospitality added a muted 7,000 jobs in June, May gains were revised down by half to only 22,000 jobs, and April was revised down to a loss of 9,000.

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