Labor Market Stays Hot in June

Scott Anderson
Chief Economist
Bank of the West

Fear of Fed rate hikes, while causing financial markets to swoon, hasn't yet doused the flames of the red-hot labor market. Nonfarm payrolls increased a strong 372k in June, just a touch lower than the downwardly revised gain of 384k jobs added in May. Manufacturing employment gains accelerated to 29k in June from an 18k gain in May, while the biggest job gains occurred in education and health care (+96k), professional and business services (+74k), trade and transportation (+68k), and leisure and hospitality (+67k). Job losses only occurred in the Federal government (-13k), while financial services job growth slowed to only 1k from 14k in May.

Another Strong Jobs Report

The strength and resilience of the June Employment Report nearly ensures another 75 basis point rate hike from the Federal Reserve before the end of the month and another 50 basis point hike in September with additional 25 basis point hikes in November and December. Our Fed funds rate forecast is unchanged from our forecast prior to the release of today's jobs report. The Fed funds rate is expected to end 2022 at 3.375% and stay at that level throughout 2023 to help cool demand and bring down consumer price inflation. Fed Funds Futures prices and Option Adjusted Interest Rate Swaps are nearly aligned on that view this morning, currently pricing in a year-end Fed Funds rate of 3.47% and 3.48%, respectively.

Fed Stays Aggressive On Rate Hikes in 2022

The unemployment rate held steady at a low 3.6% in June - in-line with our forecast. But there was a notable four tenths of a percentage point drop in the broader U6 measure of unemployment to 6.7% from 7.1%. The U6 measure of unemployment includes discouraged and marginally attached workers and those working part-time for economic reasons. The big drop in this broader measure of unemployment last month shows underemployment is evaporating quickly in this white-hot labor market, and at a pace that is not entirely visible in the headline unemployment rate.

Underemployment Evaporating Quickly

For those on recession watch and on the lookout for signs of labor market weakness, the Household survey painted the U.S. labor market in a somewhat less rose-colored light than the Establishment survey. Household employment declined by 315k in June, the second monthly drop over the last three months. Labor market weakness often shows up in the Household survey of employment first, especially at turning points, but since the Household survey measure is so noisy month-to-month it is difficult to extract the signal from the noise. For example, household employment jumped by 1.2 million in January and another 736k in March, so recent declines in household employment may be just a recalibration of the measure.

At the same time, the labor force dropped by 353k in June, bringing the labor force participation rate down to 62.2%. Declining labor force participation is another sign the labor market might not be as robust as it seems at first blush. In March the labor force participation rate was 62.4%. In a strong labor market with rising wages folks tend to come back into the labor force looking for opportunity. The fact that the trend is petering out may be a harbinger of what's ahead for the labor market.

Labor Force Participation Rate Improvements Stall Out

Despite the minor blemishes, the employment report for June reveals a labor market that is still too hot for the Fed's liking with inflation running at 41-year highs. The Fed will need to keep their foot firmly on the brake to slowdown this freight train and keep the labor market from adding to their inflation problem.

To learn more, check out this week's U.S. Outlook Report.


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