In the latest employment report, the United States recorded its slowest job growth in 2-1/2 years in June. However, the consistently strong wage growth indicates tight labor market conditions. These factors are likely to prompt the Federal Reserve to resume its interest rate hikes later this month. Let's dive into the key highlights of the report.
- The unemployment rate fell from 3.7% in May to 3.6%.
- Hourly earnings experienced a 0.4% increase, with a 4.4% year-on-year growth.
- Nonfarm payrolls increased by 209,000 in June.
- The average workweek rose from 34.3 hours to 34.4 hours.
Challenges in Job Creation
The Labor Department's report revealed that the U.S. economy added the fewest jobs in 2-1/2 years during June. The data also showed 110,000 fewer jobs were created in April and May. These figures indicate that higher borrowing costs have started to impact businesses' willingness to expand their workforce. The report also highlighted an increase in the number of individuals working part-time due to economic reasons—some experienced reduced hours due to slack work or unfavorable business conditions.
Strong Labor Market Despite Weakening Job Growth
Although the job growth rate has slowed, it remains robust in comparison to historical norms. The data, coupled with this week's findings of an acceleration in services sector activity, suggests that the economy is far from the long-predicted recession. Sean Snaith the director of the University of Central Florida's Institute for Economic Forecasting, emphasized that while the payroll numbers hint at weakening, the labor market remains strong. He stated that the Federal Reserve's work to combat inflation is far from complete, and today's report does not indicate otherwise.
Details of Nonfarm Payrolls
In June, nonfarm payrolls increased by 209,000 jobs, marking the smallest gain since December 2020. This figure fell below economists' expectations, making it the first time in 15 months that payrolls missed projections. However, job growth in the year's first half averaged 278,000 per month. To keep up with the change in the working-age population, the economy needs to create 70,000-100,000 jobs monthly.
Factors Driving Employment Growth
Companies hoarding workers is one of the factors contributing to employment growth. This practice stems from the severe labor shortages experienced during the economic recovery from the COVID-19 pandemic in 2021 and early 2022. While higher-paying industries, such as technology and finance, are reducing their workforce, sectors like leisure and hospitality and local government education are still playing catch-up after employee losses and accelerated retirements during the pandemic.
Government and Private Payrolls
Government employment saw an increase of 60,000 jobs, primarily due to a rise of 59,000 in state and local government payrolls. However, government employment remains 161,000 jobs below pre-pandemic levels. Private payrolls increased by 149,000, which is also the smallest gain since December 2020. Healthcare payrolls experienced a rise of 41,000, driven by increased hiring in hospitals, nursing and residential care facilities, and home healthcare services. Construction employment saw a significant jump of 23,000 jobs, indicating a revival in the housing market after being impacted by a surge in mortgage rates.
Professional and business services employment also witnessed increases, although temporary help, often considered a precursor to future hiring, declined by 12,600 jobs. Manufacturing payrolls experienced a moderate rebound as the sector faced challenges due to softening demand. On the other hand, retail jobs fell by 11,200. Meanwhile, leisure and hospitality payrolls increased by 21,000 jobs, albeit slower than the first quarter. This slowdown may indicate a deceleration in demand or difficulties businesses face in finding qualified candidates, as highlighted in the Institute for Supply Management's June survey, which reported that some services businesses struggle to find suitable candidates for open positions.
In conclusion, the latest employment report reveals a slowdown in job gains in the U.S. economy. However, the labor market conditions remain tight, supported by strong wage growth. While businesses may be experiencing some challenges due to rising borrowing costs, the overall employment situation remains robust. As the Federal Reserve aims to manage inflation, the decision to resume raising interest rates seems imminent. Continued monitoring of these developments will be crucial to understanding the trajectory of the labor market and its impact on the broader economy.