• The US economy added 187,000 jobs in July

• Revisions to the two prior months were negative, subtracting 49k from the previously reported figures

• Unemployment rate ticked down to 3.5%

• Wages still high as average hourly earnings increased by 0.4% MoM, 4.4% YoY

• Labor force participation held steady at its cyclical high of 62.6%

• September Fed pause set to continue

The US added a more modest 187,000 new jobs in July, a hair below consensus expectations calling for a gain of 200,000, perhaps a sign the economy is cooling enough to drive inflation lower and even stave off further increases in interest rates. The change in total nonfarm payroll employment for May was revised down by 25,000, from 306,000 to 281,000, and the change for June was revised down by 24,000, from 209,000 to 185,000. With these revisions, employment in May and June combined is 49,000 lower than previously reported. July's performance marks the second straight month below 200,000, the weakest two-month performance in two and a half years, and marks the sixth consecutive month of downward revisions to the previous month's estimate. This also resulted in hiring over the last threemonths to average 218,000 jobs per-month, slightly weaker than the 228,000 reported in June.

Employment growth was broad-based. Service-sector gains (+154k) were heavily concentrated in health care (+87k), though wholesale trade (+17.9k) financial services (+19k), leisure & hospitality (+17k) and ‘other’ services (+20k) also chipped in with modest gains. Modest gains from construction, financial activities and hospitality also contributed to private sector job growth. Weakness was also evident with job losses in professional & business services, manufacturing, information and temporary help, a reminder that the Fed's monetary policy tightening efforts are having a cooling effect on some of the more cyclical parts of the economy.

The household survey is stronger, seeing the unemployment rate drop to 3.5% from 3.6%. The labor force participation rate held at 62.6%, the fifth straight month at that level. Average hourly earnings rose 0.4% MoM – matching June’s gain – and are up 4.4% YoY.

The household survey from which the unemployment rate is derived showed employment rose by 268,000, while the labor force grew by a more modest 152,000, resulting in the unemployment rate ticking 0.1%-pts lower to 3.5%. The number of unemployed persons, at 5.8mn, changed little in July. The unemployment rate has ranged from 3.4% to 3.7% since March 2022. The participation rate held steady at its cyclical high of 62.6%. The employmentpopulation ratio, at 60.4%, remained little changed in July. The rate for those in the 25-to-64 “prime” age group edged lower to 83.4%. One area of disappointment within the household employment survey is that the strength was driven by part-time jobs. The household survey shows part-time employment rose just under 1mn last month while full-time employment fell nearly 600k. A more encompassing unemployment rate that includes discouraged workers and those holding part-time jobs for economic reasons fell to 6.7%, down 0.2 percentage point from June.

Average hourly earnings, a key figure as the Federal Reserve fights inflation, rose 0.4% for the month, good for a 4.4% annual pace. Both numbers were higher than the respective estimates for 0.3% and 4.2% and still faster growth than monetary policymakers would like. The three-month annualized pace of 4.9% stands above the year-over-year pace of 4.4%, indicating upward pressures are still evident, according to this measure of wages.

September Fed pause set to continue

The US economy added 187,000 jobs in July, signaling a healthy gain but a cool-down in the labor market, fueling optimism about the economy’s ability to avert a downturn this year. The unemployment rate fell to 3.5%, near 50-year lows. Still, last month's hiring was solid, considering that the Federal Reserve has raised its benchmark interest 11 times since March 2022.

Job growth on a trend basis continues to move in the right direction, with the six-month moving average having pushed steadily lower in each of the last nine months. While certainly a good sign, July’s pace of hiring is still running well above what is consistent with trend growth in the labor force, let alone anything weaker that would result in any sustained upward pressure on the unemployment rate.

The latest NFP report did not offer much in the way of encouraging news on the inflation front, but the release of the 2Q reading on the Employment Cost Index – which includes the Fed’s preferred wage metric – did show some signs of cooling. According to the ECI, employee compensation slowed to 4.1% (annualized) – down from 4.7% in 1Q and well-off last year’s cyclical high of 5.4%. Though this is still firmly above the 3.0%-3.5% consistent with 2% inflation, the fact that compensation is trending lower suggests that the labor market is gradually coming back into better balance. This should provide the FOMC the reassurance it needs to move to the sidelines and wait for the full effects of prior tightening to work its way through the economy.

Continued cooling in the labor market was evident elsewhere. Job openings declined in June to more than a two-year low to 9.58mn from a downwardly revised 9.62mn in May. The job openings rate remained unchanged in June at 5.8% with the downward trend extending in many of the sectors where vacancy rates remain the highest, including leisure & hospitality. The ratio of job openings per unemployed person held broadly steady at a still-historically elevated 1.61. Although lower than at the start of the year at 1.9, the ratio remains well above its pre-pandemic average of 1.2. On balance, while labor demand remains elevated, the JOLTS data suggest there is an incremental slowing in demand as compared to the prior month.

Altogether, the latest job data will probably give Fed officials some comfort that their efforts to slow growth by lifting interest rates are slowly working, while also providing evidence that the economy is not plunging into a recession. On balance, job report does not suggest any need for renewed impetus for the Fed hiking interest rates again in September. The Fed have signalled a desire to tighten policy more slowly and the report appears consistent with the gradual cooling of the labor market. Officials will need to watch incoming data — including the August jobs report and two months’ worth of inflation figures.

All eyes will now switch to CPI which will be released on August 10. Consumer price inflation is steadily moderating. Headline CPI rose just 3.0% YoY in June, the lowest annual rate since March 2021. Core inflation has been a much tougher nut to crack, registering a firmer 4.8% YoY. But even core CPI started to demonstrate some downward momentum in June. The disinflationary trend is expected to continue in July and consensus estimate a 0.2% bump in both the headline and core measures over the month. If realized, these prints would translate to a 3.3% annual headline rate and a 4.7% annual core rate. A couple more 0.2% MoM prints as the market expect should further dampen talk of a potential hike at its September 19-20 meeting, of which market bets that the Fed would hold rates steady edged higher to an 87.0% probability, according to CME FedWatch tool. Though policymakers have indicated they expect one more quarter percentage point increase before the end of the year, markets are expecting that the Fed is done with this rate-hiking cycle. One thing is for certain, rate cuts remain a long way out.

Source: BIMB Securities Research - 7 Aug 2023