Total nonfarm employment in the US returned to pre-pandemic levels in July, hotly-anticipated government data out Friday showed.
It was a milestone. The White House will doubtlessly seize the opportunity to counter a deluge of bad inflation press by touting the administration’s efforts to engineer a complete restoration of the labor market.
Although this won’t be explicit, the implication of any such spin will be clear enough: Yes, inflation is unacceptably high, but the tradeoff was worth it. I’m not weighing in on the veracity of that claim. I’m merely telling you how Democrats will spin the numbers.
The US economy added a remarkable 528,000 jobs last month, the government said, more than double the 250,000 additions consensus expected (figure below). No economist out of nearly six-dozen surveyed predicted a headline NFP print above 325,000.
Revisions added a combined 28,000 jobs to the prior two months.
With July’s gain, the economy has added 3.3 million jobs in 2022. Say what you will, but that’s a lot of jobs in a very compressed time frame.
The unemployment rate likewise recovered pre-pandemic levels, dropping to 3.5%, below consensus, and tied with February 2020 for the lowest since 1969 (simple figure below).
The participation rate ticked lower (again) to 62.1%.
Wage growth was scorching-hot. Average hourly earnings rose 0.5% MoM, far more than expected, and 5.2% YoY, easily ahead of the 4.9% economists projected. Those prints were consistent with the message from last week’s Q2 employment cost index data: The US is at risk of a wage-price spiral.
Taken together, Friday’s figures suggested labor demand remains voracious and labor supply constrained.
The read-through for markets was straightforward. Fed officials keen to cite a strong labor market in the service of dispensing with a recession narrative that’s gathered adherents over the past two months were handed an extremely robust jobs report accompanied by wage growth figures which are in no way consistent with the Committee’s inflation target.
July’s NFP report argued loudly for the continuation of rate hikes, and should increase the odds of a third consecutive 75bps hike at the Fed’s September meeting. If July’s CPI report comes in hot, expect markets to price a 75bps increment for next month’s gathering as a virtual lock.
Some market participants recently pointed to a disparity between the household and establishment data in the jobs report to suggest negative readings on the former may presage downward revisions to the headline NFP prints. July’s report showed a 179,000 gain on the household survey.
That pushed the three-month moving average back into positive territory (figure above).
And in any event, there’s scant evidence for the narrative that says negative household readings are generally associated with an eventual “reckoning” (so to speak). Earlier this week, Bloomberg’s Cameron Crise ran the numbers.
“I sorted for all months since 1996 in which the initial nonfarm payroll gain was at least 200,000 and the household data was negative, and checked to see what happened with the final NFP revisions,” he wrote, adding that as “it turns out, not only did none of these episodes occur during an NBER recession, but the average payroll revision was +19,000.” He called the results “kind of surprising,” on the way to concluding that, “I guess it illustrates why household employment figures are relegated to secondary status in the monthly report — they don’t really tell us that much about the underlying state of job growth.”
Employment is a lagging indicator, and jobless claims have moved up. The four-week moving average for initial claims is the highest since November, and job openings fell the most on record in June outside of the initial pandemic plunge. At the same time, a bevy of corporate heavyweights have announced hiring freezes and layoffs as part of an ongoing reassessment of staffing needs in the context of an expected deceleration in economic activity both at home and abroad.
All of that said, July’s jobs report was unequivocal: The US labor market hasn’t rolled over yet. Maybe, in the fullness of time, we’ll discover that in fact, the US was in a proper recession during the summer of 2022. As any regular reader will quickly attest, I’m certainly open to such a thesis. I’d wager I’ve seen more recessions than many of my readers. I’m the furthest thing from a macro Pollyanna.
But right now, as it stands, it’s very difficult to make the case for a recession in the NBER sense, and even if you could make the case, the Fed wouldn’t listen, which is really all that matters.
Of course, the Fed will get another jobs report between now and the next policy decision. Anything can happen. BMO’s Ian Lyngen captured it well. “If the FOMC meeting was tomorrow, [July’s jobs report] would make a 75bps hike the path of least resistance,” he said. “Alas, there is still a lot of data between now and the September 21st meeting.”