The ‘extremely hot’ job market is becoming more and more ‘just right’

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In recent weeks, we’ve seen evidence accumulate that the economic narrative is shifting toward a state in which growth is cooling from superheated levels — but not so much that the economy is heading into a recession.

The US jobs report for May released on Friday provided further confirmation of this shift.

According to the report, US employers added 390,000 healthy jobs in May. That was down from 436,000 jobs added in May but still stronger than the 318,000 gain economists had expected.

The unemployment rate was unchanged at a very low 3.6%², although it is noteworthy that participation in the labor force improved to 62.3% with 330,000 people entering the labor force.

Not very hot. And not very cold. But just right. From the story “The Temperate Bear and the Three Bears”. (GT)

Average hourly wages in May rose 0.3% from April, reflecting a 5.2% increase from a year ago. However, this is a slight decrease from the 5.5% annual growth rate in April and the 5.6% rate in May.

In short, the United States continues to get people back to work, which is Good news for economic growth. The pace of job growth may be slowing, but employers seem to be drawing people back into the workforce without causing wage growth to accelerate, which is good news for Those looking to reduce inflation.

This is exactly the kind of balance the Federal Reserve is hoping to achieve as it continues to tighten monetary policy in its efforts to cool inflation from very high levels.

Here’s some of what top Wall Street economists said after Friday’s report:

“It appears we are past the peak of wage inflation.” – Stephen Juno, US Economist at Bank of America “There is simply a good chance that wage growth has passed its cyclical peak and that the cooling trend is continuing.” – Bob Schwartz, chief economist at Oxford Economics “Today’s report lands in a good place for the Fed.” – Sarah House, Wells Fargo Chief Economist “For the Federal Reserve, today’s report is likely to be the best they can hope for in the early rounds of the tightening cycle.” – Michael Feroli, JPMorgan Chief US Economist “The slowdown in wage growth is encouraging as it indicates that broader cyclical price pressures in the economy are approaching a peak. But it will take a slowdown in annual wage growth to nearly 4% before the Fed claims that it It is making significant progress towards the inflation target.” – Michael Pierce, chief US economist at Capital Economics “In short, the May report supports your view that while the labor market remains flat, it is gradually continuing to slow.” – Oscar Munoz, macro analyst at TD Securities We see slower payroll growth next month, but that shouldn’t come as a huge surprise considering that 21.2 million jobs have now been filled out of the 22 million jobs lost in March and April 2020.” – James Knightley, ING Chief International Economist “This is a watershed moment for the payroll trajectory and now highlights directly just how profound this transformation is.” – Rick Reeder, CIO, Global Fixed Income at BlackRock

It may seem strange to celebrate the slowdown in wage growth. But high wage growth amid tight supply is part of the reason we have high inflation. Wage growth would not be of much value if inflation was killing your purchasing power. This is why good news is bad news these days.

More signs that the job market is upside down

For nearly two years now, we’ve been hearing about growing labor shortages across industries as millions of jobs – and we’re still getting – unfilled, a challenge that has caused wages to rise, which in turn has driven up inflation in goods and services.

But in recent weeks, we’ve had signs that the job market may be at an inflection point.

Here are some data points:

None of this screams slack, especially with layoffs at record lows. Taken together, however, it appears that the job market is a little hotter than it was earlier this year and that people are transitioning into it.

The fact that this cooling has so far come without an appreciable rise in the unemployment rate will be good news for the Fed as it is maneuvering to bring down inflation.

However, inflation data will be closely watched in the coming months. Because keep in mind: The Fed’s ultimate goal isn’t just to slow the economy. Its ultimate goal is to calm inflation. Using policy tools to slow the economy is just a way to achieve those ends.

Related from TKer:


Stocks go downThe S&P 500 fell 1.2% last week. The index is now down 14.3% From the January 3 closing high of 4,796.56, but 5.3% above the May 19 closing low of 3900.79. To learn more about market volatility, read this is And the this is. If you want to read about bear markets, read on this is.

Bankers talk about ‘hurricanes’: Senior US bankers used some colorful metaphors this week to describe the state of risk in the economy. Here’s Jamie Dimon, CEO of JPMorgan Chase (via Release): “Now it’s kind of sunny. It’s going well. Everyone thinks the Fed can handle this. That hurricane is right there on the road coming our way. We don’t know if it’s a little storm or Super Sandy.. You better prepare yourself.”

And here’s Bank of America CEO Brian Moynihan (via Release): “We’re in North Carolina. You have hurricanes that come every year. So we’re always prepared if we don’t have a choice.”

🤔 I like Moynihan’s characterization a little better because the truth is that there are always economic risks lingering and things can definitely go wrong in the near term. And they often do! That is why it is always good to be prepared. But it’s also a good idea to be prepared knowing that things always work out better in the long run.

Microsoft Software Outlook: In a regulatory filing on Thursday, Microsoft lowered its revenue and profit guidance for the current quarter “due to the unfavorable movement of foreign exchange rates in the quarter ending May.”

We could see more Microsoft-like warnings in the coming weeks because S&P 500 companies generate about 40% of their revenue from outside the US, according to FactSet. The US dollar has strengthened significantly this year, which means that the value of sales made abroad is declining.

(Source: FactSet)

(Source: FactSet)

However, analysts are still forecasting healthy earnings growth for 2022 and 2023.

Manufacturing recovery: According to the Institute of Supply Management (ISM), manufacturing activity accelerated in May: “Manufacturing performed well for the 24th consecutive month, with demand growing faster month-on-month and consumption declining due to workforce restrictions,” Timothy Fiore, Chairman of the Manufacturing Business Survey Committee ISM, on Wednesday. The turmoil experienced by overseas partners is beginning to affect manufacturing in the United States, creating near-term headwinds for factory production growth. Ten percent of public comments from panel members expressed difficulty obtaining materials from their Asian partners, which would affect reliable deliveries in the summer months.” To learn more about manufacturing, read this is.

Consumer confidence is declining: The Conference Board’s Consumer Confidence Index fell to 106.4 in May from 108.6 in April: “Buying intentions for cars, homes, major appliances and more — likely a reflection of higher interest rates and consumers shifting from expensive goods to spending ‘on services,'” said Lynn Franco of Conference Board Vacation plans have also been relaxed due to price hikes In fact, inflation remains at the forefront of consumers’ minds, with their May inflation expectations virtually unchanged from April’s highs. Looking ahead, we expect higher prices and additional interest rate hikes to pose risks Continued decline in consumer spending this year.”

Keep in mind that weak consumer confidence does not necessarily mean lower consumer spending. For more information on this, read this is And the this is.

Housing prices soarUS home prices in March jumped 20.6% from a year ago, according to the S&P CoreLogic Case-Shiller Index. This is the third highest reading in the index’s history. From S&P DJI Craig Lazzara: “Those of us who were expecting a slowdown in the rate of home price growth in the US will have to wait at least a month… Mortgages are getting more expensive as the Federal Reserve begins to raise interest rates, indicating that the environment Macroeconomics may not support the extraordinary growth of house prices for much longer. Although one can safely predict that price gains will begin to slow, the timing of the slowdown is more difficult.”

On the road

These days, no economic metric is more important than inflation. Friday comes with the May CPI report. Economists estimate that the consumer price index rose 0.7% from April, reflecting an 8.2% rise from a year ago. Excluding food and energy prices, core CPI is estimated to have increased 0.4% month over month or 5.9% year over year. Will the report confirm that peak inflation is behind us?

The CPI is down from its March high of 8.6%.  (Source: TKer)

The CPI is down from its March high of 8.6%. (Source: TKer)

2.34 million jobs have been created so far in 2022. It is one of the most convincing statistics that the US economy has not drifted into recession.

21 million jobs have been created since April 2020. (Source: TKer)

21 million jobs have been created since April 2020. (Source: TKer)

² The unemployment rate is currently at its lowest level since the pandemic began. Before the pandemic, the unemployment rate was as low as 3.5% in January and February 2020.

The civilian workforce consists of adults who have jobs or are actively looking for jobs. The labor force participation rate represents the civilian labor force as a percentage of the adult population. One reason why 11 million jobs still exist is that the labor force participation rate has not yet returned to pre-pandemic levels. You can read more on this topic here.

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