Second Straight Month of Sub-200,000 Job Gains Signals Cooling Labor Market
Economic news and commentary for August 4, 2023
US Employment
The latest US jobs report has revealed a continuation of a slowing in hiring, marking the second consecutive month with job additions below 200,000. In July, the US added 187,000 jobs, and the unemployment rate showed a slight improvement, edging down by -0.1 percentage points to reach 3.5%. The labor force participation rate remained flat at 62.6%, consistent with its level over the past few months. On a YoY basis, the participation rate saw a modest increase of 0.5 percentage points.
The total number of unemployed individuals decreased by -116,000, indicating a decline in joblessness. However, despite the drop, the number of unemployed individuals remains only slightly above the figures from a year ago. The most significant decline in joblessness was observed in the short-term unemployed segment, which comprises individuals without a job for less than 5 weeks and from 5 weeks to 14 weeks. The former fell by -64,000, while the latter fell by -191,000 compared to the previous month. Notably, both short-term unemployed categories are now below their respective levels from a year ago. In contrast, long-term unemployment (27 weeks or over) saw an increase of 59,000 in July, currently standing at approximately 60,000 above the figures from a year ago. Overall, while some cracks are starting to show, the trend in hiring has not undergone significant changes. The three-month average of job gains experienced a minor decrease of -10,000 to reach 218,000 in July, still above that 200,000 level.
The breakdown of job gains revealed a slowdown in hiring within key services industries. The health care sector added 63,000 jobs, and the social assistance industry added 24,000 jobs. These two industries were the strongest gainers in July. On the other hand, the leisure and hospitality industry only saw an increase of 17,000 jobs, and the business services industry incurred a loss of -8,000 jobs. These industries were the primary contributors to job growth over the last year, but are now feeling the effects of a slowing economy.
Wage growth trends align with that slowdown in hiring in services industries. Average hourly earnings grew by 0.4% MoM and 4.4% YoY in July, remaining unchanged from the previous month's YoY growth rate. Monthly wage growth has remained mostly stable despite other recent reports indicating signs of easing. In particular, services wage growth slowed down in July, reaching 4.1% YoY, down from the previous reading of 4.3% YoY. The slowdown in services wage growth was offset by a continued increase in goods sector wage growth. Goods earnings improved by 0.7% MoM, leading to an acceleration in YoY change to 5.3% YoY from 5.1% YoY previously. This offset the slowdown in services wage growth and made the overall rate look sticky.
The contrast in the employment and earnings results paint a somewhat concerning picture. The labor market is showing signs of easing, though the progress remains slow which suggests that a soft landing in terms of unemployment may be possible if inflation continues its current trajectory. However, the stickiness of wage growth, driven by a renewed increase in goods sector compensation, could present a potential roadblock on this path. As a result, the Federal Reserve, not viewing the current pace of wage growth as consistent with disinflation, may prefer to continue tightening its policy.
Still to come…
10:00 am (EST) - Canada Ivey PMI
Morning Reading List
Other Data Releases Today
German manufacturing new orders surged 7.0% MoM in Jun after a 6.2% MoM increase in May. A large drop in March (-10.9% MoM) has offset the last two months. On a QoQ basis, new orders are only up 0.2%.
French industrial production fell -0.9% MoM but was up 1.1% YoY in June. Manufacturing production fell -1.0% MoM. Capital goods production edged down -0.3% MoM but is still up 7.3% YoY. Machinery production is still up 6.4% YoY.
French employment growth was just 0.1% QoQ in Q2 2023 after growing 0.4% QoQ in Q1 2023. In contrast, temp employment fell 0.8% QoQ after a strong -2.2% QoQ decline previously. Services employment growth was just 0.1% QoQ.
Italian industrial production improved 0.5% MoM in June but is still down -0.8% YoY. Manufacturing production is down -0.2% YoY. Transport equipment production has surged over the past year, up 25.1% YoY, offsetting weakness in other sectors.
Euro area retail sales fell -0.3% MoM and -1.4% YoY in June. Food and non-food sales both fell, -0.3% MoM and -0.2% MoM respectively. Fuel sales grew 1.0% MoM. The largest YoY decline is in food sales, down -3.5% YoY.
Bank of England Announcement
Bank of England opts for smaller rate hike after better inflation news (ING) - The Bank of England is keeping all its options open on future rate hikes, although another rise in September seems highly likely. Whether that's repeated in November is a more open question, particularly if services inflation starts to fall more noticeably between now and then.
US Services PMI
U.S. Services Sector Still Expanding (BMO) - The U.S. services sector continued to expand in July, albeit at a slower pace, thanks to moderating business activity, new orders and employment growth. Overall, demand for services remains robust, likely keeping rates higher for longer.
ISM surveys point to softer US jobs and growth numbers ahead (ING) - The ISM activity indicators suggest that manufacturing is in recession and service sector output is becoming a little more sluggish. In the near term their employment components indicate the likelihood of slowing hiring while the tightening of lending conditions and higher market interest rates indicate the threat of a major slowdown can't be ignored.
Services Activity is Cooling, Prices Are Not (Wells Fargo) - The ISM services index and most of its sub-components signal a service sector that is growing at a slower rate in July. The exception is prices,which are increasing faster, although the current reading of 56.8 is not cause for major alarm.
The ISM Non-Manufacturing Index Declined to 52.7 in July (First Trust Portfolios) - No sign of a recession in the services sector just yet, but the sector
is growing at a slower pace. Activity continued to expand in July with fourteen out of eighteen major industries reporting growth. Contrast this with the July ISM report on the manufacturing sector – where activity contracted for the ninth month in a row and only two industries reported growth – businesses and consumers are clearly shifting their preferences back toward services following the COVID-era where goods-related activity was artificially boosted.
ISM Index Shows Services Sector Expansion Continued in July (TD Bank) - The services sector continues to do the bulk of the heavy lifting in helping the economy defy the 525 basis points of rate hikes the Fed has thrown at it since last year. Despite the pace of new business growth slowing, consumer demand for services remains robust – helping order backlogs grow for the first time in months.
US Productivity & Costs
Nonfarm Productivity Increased 3.7% at an Annual Rate in Q2 (First Trust Portfolios) - Nonfarm productivity rose in the second quarter by the most in almost three years, increasing at a 3.7% annualized rate, as output rose while hours worked declined, leading to more output per hour. In spite of the large gain in Q2, productivity – output per hour – is up a modest 1.3% in the past year and up at a similar 1.4% annual rate versus the prior business cycle peak at the end of 2019 (pre-COVID).
Productivity: Back in the Black (Wells Fargo) - Productivity growth bounced back strongly in Q2, surpassing expectations and rising at a 3.7% clip. Through the quarter-to-quarter volatility, the recent trend in productivity is firming. Over the past year, output per hour worked has risen 1.3%, the first positive one-year gain since late 2021. The improving trend in productivity along with slowing nominal wage growth points to inflationary pressures from the labor market starting to subside.
US
U.S. Downgrade a Reminder That Rising Deficits Can Have a Cost (PIMCO) - The sovereign credit rating cut is unlikely to significantly change views toward U.S. Treasuries, but questions about debt sustainability may grow louder over time.
Why Do Forecasters Disagree about Their Monetary Policy Expectations? (Liberty Street Economics, NY Fed) - While forecasters generally disagree about the expected path of monetary policy, the level of disagreement as measured in the New York Fed’s Survey of Primary Dealers (SPD) has increased substantially since 2022. For instance, the dispersion of expectations about the future path of the target federal funds rate (FFR) has widened significantly. What explains the current elevated disagreement in FFR forecasts?
Lending Standards Tighten Further as Banks Expect More to Come (NAHB) - According to the Federal Reserve Board’s July 2023 Senior Loan Officer Opinion Survey (SLOOS)—conducted for bank lending activity over the second quarter of 2023—banks reported that lending standards tightened for all residential real estate (RRE) and commercial real estate (CRE) loan categories. Demand for RRE and CRE loans weakened across all categories over the quarter.
Panic or Panacea?: The Economic Impact of Artificial Intelligence, Part I - The Effects of Technological Revolutions on Productivity Growth (Wells Fargo) - Artificial intelligence is one of the most, if not the most, important technological revolutions in recent memory. The ability for large machine-learning models to generate new content represents a distinct leap in automation technology. But will generative AI be an economic friend or foe in coming years? We will discuss the potential economic effects of artificial intelligence in a four-part series of reports. We focus on the potential effects of AI on productivity growth in this first installment in the series.
Europe
Underlying inflation measures: an analytical guide for the euro area (ECB) - Developments in underlying inflation are a key input for the ECB’s monetary policy assessment. In making monetary policy decisions in an environment of elevated uncertainty, the ECB’s Governing Council has stressed the need to pay particularly close attention to the implications of the incoming data for the inflation outlook, developments in underlying inflation, and the strength of monetary policy transmission.
Türkiye | Renewed inflationary pressure (BBVA) - Consumer prices rose by 9.49% in July, higher than our expectation (9%) and market consensus (8.6%) while annual consumer inflation accelerated significantly to 47.8% from 38.2% the month before. We expect annual consumer inflation to accelerate to near 65% at the end of 2023 and only decline to 35-40% by 2024 year-end.
Canada
A Slow Road to Recovery for Canadian Tourism Spending (TD Bank) - Canada’s tourism sector has bounced back briskly since the initial COVID-19 lockdowns. However, the pace of recovery is now easing as the sector faces headwinds from higher interest rates, a slowing jobs market, and broader cyclical slowdown in the U.S. and abroad.
Outlook
Monthly FX Outlook: Datapoint by Datapoint (CIBC) - Greater dissonance between the Fed and the market alongside liquidity risks portend to near-term USD strength. USD sellers should still look at rallies to get active over the medium-term.
US, China inflation and GDP readings across the regions (S&P Global) - A busy economic calendar in the week ahead is filled with inflation figures, most notably from both US and mainland China, as well as second quarter GDP data from the UK, Singapore, Indonesia, Philippines and Hong Kong SAR.
Markets
AI: boom, bust or sustainable earnings bump? (DWS Group) - Artificial Intelligence could bring big productivity boosts across industries. Being able to reliably identify long-term winners and losers is a different matter altogether.
Research
Random Walk Forecasts of Stationary Processes Have Low Bias (Cleveland Fed) - We study the use of a zero mean first difference model to forecast the level of a scalar time series that is stationary in levels. Let bias be the average value of a series of forecast errors. Then the bias of forecasts from a misspecified ARMA model for the first difference of the series will tend to be smaller in magnitude than the bias of forecasts from a correctly specified model for the level of the series. Formally, let P be the number of forecasts.
Urban and Regional Migration Estimates: Will Your City Recover from the Pandemic? (Cleveland Fed) - The COVID-19 pandemic caused a massive change in the movement of people at both the neighborhood and the regional levels in the United States. New migration estimates will enable us to track which urban neighborhoods and metro areas are returning to their old migration patterns and where the pandemic has permanently shifted migration trends.
Dealers' Treasury Market Intermediation and the Supplementary Leverage Ratio (Federal Reserve) - Treasury market intermediation by dealers, including Treasury securities market making and financing, requires regulatory capital. In particular, the six largest U.S. Treasury securities dealers are subsidiaries of large U.S. bank holding companies (BHCs),2 which are required to maintain a supplementary leverage ratio (SLR) of at least 5 percent at the BHC level.3 The SLR is a non-risk weighted capital requirement and is measured as the ratio of a banking organization's Tier 1 capital to its total leverage exposure (TLE).
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