Economic Commentary

Labor market finally cools off: Weekly Economic Review & Outlook

July 10, 2023
People waiting in line outside of a job center.

Job growth slowed in June as the labor market finally started to show some cracks at mid-year. However, the labor market remains tight with a very low unemployment rate and continued strong wage growth. While the froth for hiring has cooled a bit, price conditions remain too hot which should lead to another rate hike at the FOMC meeting later this month.


Key Takeaways:

What we learned last week: (pg. 1)

Job growth is trending downward

June’s lower print plus downward revisions provided evidence of a slower, but not slow, hiring trend.

Input prices climbing more slowly for services

Input prices for service industries are still rising, but the pace of increase has slowed sharply over the past year.

What we’re watching this week: (pg. 2)

July 12: Consumer Price Index

Decelerating food, energy, and used car prices likely dampened CPI

Cooler prices for food and energy helped to slow the consumer price index (CPI) in May. This trend should continue in June as gas prices have remained steady since the beginning of May and food inflation should ease further — with a softish 0.2 percent rise in the headline CPI expected. This would lower the year-on-year rate sharply for the overall CPI from 4 percent to about 3.1 percent, the slowest pace since March 2021. The large deceleration in the year-on-year rate is due to easy comparisons from a year ago when overall CPI jumped 1.2 percent in June 2022. The monthly rise in core CPI should be faster relative to the headline again in June, rising by 0.3 percent due to lingering upward pressure from core service prices but lower used car prices should help provide some offset. The year-on-year pace for core CPI should fall from 5.3 percent to 5 percent, again helped by an easy comparison to a year ago.

July 13: Producer Price Index

Producer price inflation should moderate

The producer price index has decelerated sharply over the last six months, primarily due to the disinflationary trend for goods. But the slower trend for goods inflation has reversed gears a bit in the past several months. Similar to CPI, food and energy inflation at the wholesale level has been easing from very high rates, which should put less pressure on the headline PPI. Finished consumer goods have been declining, with crude food prices falling, likely leading to downward price movements soon. We forecast PPI in June to increase by a cooler 0.2 percent at both the headline and core readings.

July 14: Univ. of Michigan Sentiment

Consumer sentiment should improve with easing inflation

Consumer sentiment improved at the end of June, rebounding from May’s slump, with short-term inflation expectations hitting a two-year low. The Conference Board Consumer Confidence measure also rose in June with both consumer expectations and present situation components rising on the month. Softening inflation and the resolution of the debt ceiling crisis outweighed growing concerns consumers had about their personal finances stemming from higher interest rates. Consumer sentiment is expected to tick higher in the first half of July as easing inflation readings and the resiliency of labor demand soothes some worries about the impact of higher interest rates on households’ budgets.

Analysis: Job growth cools but labor market remains tight

Nonfarm payrolls expanded by 209,000 in June, moderately below consensus. But there were also significant downward revisions totaling 110,000 to the prior two months, placing the employment level in June well under expectations. Moreover, with a 60,000 increase in government workers over the month, private payrolls grew by only 149,000, the weakest monthly increase since December 2020. Private services employment, in particular, climbed just 120,000 (down from the average gain of 170K in the prior three months), also the slowest advance since December 2020. When combined with recent increase in initial jobless claims, there has clearly been a downshift in hiring activity — but notably the 3-month trend for job gains at 244,000 is still higher than the long-run average.

The market for labor, however, remains tight. The unemployment rate fell to 3.6 percent despite the labor force participation rate holding steady at 62.6 percent. Additionally, average hourly earnings rose by a strong 0.4 percent in June and the 12-month growth rate stood at 4.4 percent — unchanged over the past three months. For comparison, pre-pandemic growth in wages was around 3 to 3.5 percent. Average weekly hours also climbed, suggesting a significant boost to incomes over June which likely kept consumer spending elevated. Again, while readings have eased modestly so far in 2023, it will likely be a long time until there is widespread weakness in the labor market.

The softer job gains will certainly be a welcome sign for Fed officials after several months of upside surprises. But the rapid pace of wage growth should continue to place upward pressure on core inflation, a key measuring stick for the Fed. We expect Fed commentary in coming weeks to maintain a hawkish tone, emphasizing there is more work to be done to bring inflation back to trend. This should culminate in another rate increase at the July FOMC meeting, while leaving open the possibility of further tightening if economic activity and inflation do not slow sufficiently this summer.

Analysis: Divergent trends continue for manufacturing and services

The ISM manufacturing index fell in June to its lowest level since May 2020, also marking its eighth straight month in contraction — the longest such streak since 2009. The drop was due to a decline in the production, employment, and inventories sub-indexes, which reflects softening demand for goods. Additionally, input prices fell rapidly in June, and anecdotal comments from respondents indicate that the market for manufacturing inputs now favors buyers.

On the other hand, the ISM services index climbed in June to a level (53.9) suggesting relatively solid sector expansion. Demand metrics (i.e., business activity and new orders) were strong again, while the employment index climbed back into expansion after one month in contraction territory. Survey responses consistently noted that business is solid but also expressed struggles in dealing with inflation and caution regarding the outlook for the economy.

On the inflation front, the prices paid index for services provided some good news, falling to its lowest level since March 2020. Inflationary pressures are still present, with a reading over 50 in June (the expansion/contraction dividing line), but there is a steep downward trend in input price growth over the past 18 months. In combination with falling input prices on the manufacturing side (discussed above), the overall trend in these surveys is encouraging for future inflation figures.


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