July ADP Employment Report Finds 1 Million Jobs Added in the Last Three Months
Economic news and commentary for August 2, 2023
US ADP Employment Report
The ADP Employment Report, the predecessor to the more official BLS jobs report, reports that the US added 324,000 jobs in July with small and medium-sized businesses driving the gain, adding 237,000 and 138,000 jobs respectively. Slightly offsetting the substantial gains there were job losses totaling -67,000 at larger firms of 500+ employees. This trend of smaller businesses outhiring larger businesses was also evident in the June report. The service sector led the way in hiring with leisure & hospitality, trade & transportation, and education & health services showing strong gains in July. The breakdown in the employment gain suggests that the top hirers in the country right now are smaller, consumer-facing businesses like bars and restaurants and other similar entities that were hit hardest during the pandemic. This lends credence to the argument that post-pandemic demand dynamics are still lingering with many consumers still catching up on the lost recreational activity in 2020-2022.
Despite the continued expression of strong labor demand, wage growth cooled in July. The annual pay growth for job changers was reported at 10.2% YoY, down from 11.2% YoY in June. Similarly, pay growth for job stayers slowed to 6.2% YoY, slightly lower than 6.4% YoY previously. Wage growth in the leisure & hospitality sector eased from 8.4% YoY in June to 7.9% YoY in July as it converges quickly with other industries. Outside of this industry, there wasn’t much of a change in the page of annual pay growth, but there also wasn’t any industry that saw pay growth advance.
The gradual cooling in labor costs is consistent with the marginal decline in job openings reported yesterday. Both are signals of weakening hiring demand as higher interest rates start to dim firms’ outlooks on operations. However, it is worth noting that job openings aren’t just being canceled due to that position not being necessary any longer. Instead, the positions are being filled by new employees which does put downward pressure on the available labor supply. The Fed would like to see the pace of job growth slow more substantially to go along with the clearing out of job openings to have more of an impact on labor costs and inflation. Of course, we will have to wait for the BLS report tomorrow to truly deliberate on whether or not July job gains point to further tightening, but the ADP preview has me thinking the Fed will tilt more hawkish after this week ends.
Still to come…
10:30 am (EST) - EIA Petroleum Status Report
9:30 pm - Australia Trade
Morning Reading List
Other Data Releases Today
Manufacturing PMIs in the ASEAN region are weakening alongside China's PMI.
The S&P Global ASEAN Manufacturing PMI edged down to 50.8 in July, down from 51.0 in June. This is the 3rd straight decline in the index.
Interest rates are on the rise in the euro area. The composite cost-of-borrowing indicator for new corporate loans jumped 22 bps to 4.79% in June. The rate on new home loans to households grew 12 bps to 3.70%.
Spain's total number of unemployed falls to the lowest level since 2008 at 2.7 million in July, down -205,938 or -7.1% YoY. Unemployment among young people, a total which is particularly economically sensitive, was at a new record low of just 184,038.
US ISM Manufacturing PMI
Message from ISM: Recession Likely, Not Inevitable (Wells Fargo) - The ISM notched a ninth straight month in contraction in July as employment fell to a 3-year low. Yet new orders rose to a 9-month high as production also improved. The signal from the ISM is bleak, but the 1990s mid-cycle slowdown was just as bad. Recession is likely but not inevitable.
Manufacturing Sector Activity Continued to Soften in July (TD Bank) - The manufacturing sector is showing signs of contraction for the ninth consecutive month with little change in the headline index, and all subcomponents showing declining activity. Moreover, only two of 18 industries reported growth in July, down from four in June. The weakness in the sector is growing more pervasive – as would be expected given that new orders have now declined for 11 consecutive months.
Cruel Summer? (BMO) - The ISM manufacturing PMI edged up 0.4 pts to 46.4 in July after dropping to over three-year lows in the prior month. The gauge has held below the 50-mark—which indicates shrinking activity—for 9 straight months. That’s the longest stretch in contraction terrain since the financial crisis.
US industrial activity feels the headwinds (ING) - The US service sector continues to perform relatively strongly, but manufacturing is struggling as highlighted by the ninth consecutive contraction of the ISM report. Meanwhile, residential construction is rising due to a lack of homes for sale, but non-residential is starting to feel the squeeze from tighter lending conditions.
The ISM Manufacturing Index Increased to 46.4 in July (First Trust Portfolios) - Activity in the US factory sector contracted for the ninth month in a row in July, though at a slightly slower pace. Looking at the details, only two of eighteen industries reported growth in July. We continue to believe a recession is on the way and today’s report shows the goods sector of the economy is likely to lead
the way.
US JOLTS
Construction Job Openings Little Changed (NAHB) - The count of open, unfilled jobs for the overall economy continued to moved lower in June, falling to 9.6 million. While ongoing tight labor market conditions have raised the likelihood of a September Federal Reserve interest rate increase, the JOLTS survey is another data point indicating an ongoing but gradual cooling of macro conditions due to elevated interest rates.
June JOLTS: Labor Market Continues to Slowly Simmer Down (Wells Fargo) - The jobs market remains exceptionally tight but continues to show incremental signs of loosening. Job openings slipped to 9.58 million in June, more than a two-year low. Turnover has also quieted down, with the quit rate ticking back to 2.4% and layoffs still near historic lows. Since the Fed began tightening policy in March 2022, job openings have fallen 20% while the unemployment rate has trended sideways.
US Construction Spending
June Gains in Private Residential Construction Spending (NAHB) - NAHB analysis of Census Construction Spending data shows that private residential construction spending rose 0.9% in June after an increase of 2.9% in May. Spending stood at a seasonally adjusted annual pace of $856.3 billion. However, total private residential construction spending is still 10.4%% lower compared to a year ago.
Construction Spending Improves Again: Residential Rebound Fuels Pick Up in June (Wells Fargo) - Despite macroeconomic headwinds sapping construction in some sectors, overall construction spending is improving on-trend. Outlays increased 0.5% over the month, the sixth consecutive bump. June’s improvement translated to a 3.5% annual gain. Robust manufacturing investment continues to lift nonresidential spending as firms expand their capacity for semiconductor and electric vehicle production. Residential spending was another bright spot, fueled by widespread improvements in single-family and multifamily building.
PMIs
Factories report deeper global production downturn in July as world trade slumps (S&P Global) - The JPMorgan Global Manufacturing Purchasing Managers' Index™ (PMI™) compiled by S&P Global, held steady at 48.7 in July. However, by remaining below 50, the indices signaled an eleventh successive deterioration in the health of the goods-producing sector. Moreover, the headline index masked worsening downturns in both production and new orders, the latter linked to a steepening slide in global trade flows and an ongoing focus on inventory reduction.
Worldwide producer prices deflation slows in July amid rising wage pressures (S&P Global) - Average prices charged by factories for their goods fell worldwide for a third month in a row in July, according to the JPMorgan Global Manufacturing Purchasing Managers' Index™ (PMI™) compiled by S&P Global. However, the rate of decline moderated, as deflationary forces from falling raw material and energy costs, as well as weaker demand-pull forces, were partially countered by increasingly elevated wage pressures. The data therefore hints at some stubborn stickiness of core inflation globally.
US
Fitch Downgrades the United States' Long-Term Ratings to 'AA+' from 'AAA'; Outlook Stable (Fitch Ratings) - Fitch Ratings has downgraded the United States of America's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA+' from 'AAA'. The Rating Watch Negative was removed and a Stable Outlook assigned. The Country Ceiling has been affirmed at 'AAA'.
Why market rates may continue to rise after the Fed peaks (ING) - The 10-year Treasury note may rise above 4% even though the Federal Reserve is at, or very near, the peak in its current tightening cycle, according to ING's Padhraic Garvey. In this video, he explains why.
Europe
The ‘real’ dynamics of core inflation in the eurozone (ING) - As the European Central Bank has been putting increasing emphasis on the recent readings of underlying inflation, it is more important to look at the short-term dynamics than at the year-on-year figures. While some easing of inflationary tensions is indeed observable, it would be premature to exclude another rate hike.
NL Update - Dutch manufacturing PMI improves slightly (ABN AMRO) - The Nevi Netherlands Manufacturing PMI improved slightly, from 43.8 in June to 45.3 in July. The index registered below the critical 50.0 no-change threshold, signalling that business activity is still falling.
Swedish July PMI: Stuck in contraction (Nordea) - The manufacturing PMI rose to 47.6 in July from 45.2 in June. Despite the rise, the PMI indicates a recession in the manufacturing industry.
Spain | July employment records were less positive than expected (BBVA) - The growth in Social Security affiliation (21,900) and the reduction in unemployment (-11,000) in July were lower than expected. Seasonally adjusted, the number of affiliates increased by 16,000, 5,000 more than in June, and the number of unemployed by 11,000 after nine months of decline.
Australia
NAB Monetary Policy Update – 2 August 2023 (NAB) - Following the RBA’s decision to keep rates on hold at 4.1% for a second consecutive month, we now see only one more increase this cycle, taking the cash rate target to a peak of 4.35% (previously 4.6%). In terms of timing, we see this as likely at the November meeting, following the release of the Q3 CPI.
Markets
Use This 'Goldilocks Market' to Prepare for Its Eventual End (Guggenheim) - Talk of Goldilocks has taken hold in the markets, and with it the risk-taking allure of not-too-hot and not-too-cold investing conditions. Just a few weeks ago the market was preparing for two or more hikes and a well-telegraphed recession to prompt the start of a Federal Reserve (Fed) easing cycle in the second half of 2023, but now consensus is rapidly building for no more hikes after July and no recession at all. Two-year and 10-year Treasury yields have retreated some 30 basis points from recent peaks, and stocks have rebounded. “Markets Appear Convinced the Fed Can Pull Off a Soft Landing,” read the headline in the Wall Street Journal on July 16.
Why are stocks up this year…and can the rally continue? (First Trust Portfolios) - The ROI podcast discusses some of the most important questions facing investment professionals today.
Research
Understanding Migration Trends to Prepare for the Post-Pandemic Future (Cleveland Fed) - As the country has emerged from the pandemic, the places where people have traditionally lived and spent their money have shifted. Considering how our region has fared relative to the rest of the nation, this analysis reveals the region’s strengths and weaknesses and points to seven key insights that should guide policy decisions as we prepare for the post-pandemic years.
Crypto
The state of crypto – August 2023 (Saxo Bank) - The crypto market has been characterized by remarkably low volatility in the last month. It appears that the market has found some price stability, from where much flow is required to move the price substantially in either direction. The Bitcoin ETF filing by BlackRock appears to attract investors to other exchange-traded Bitcoin instruments, as the latter saw a substantial inflow in July.
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