Jerome Powell got the all-clear signal for a 75-basis point interest rate raise on Friday when the Department of Labor reported the jobs numbers for June.
The U.S. economy swept another 372,000 Americans onto employer payrolls. Hiring was even stronger than that in the private sector, which took in an additional 381,000 workers. That’s enough to push private sector payrolls up 140,000 higher than February 2020, the last month before the pandemic hit the economic data.
Economists had expected far fewer jobs. The myriad signs that the economy was slowing down and that inflation was weighing on real growth in goods and services seemed to imply a bigger slowdown in hiring. The consensus forecast was for around 250,000 jobs added, with the top of the range of estimates at 350,000. So the June numbers topped even the most optimistic views.
At least for now, these figures will allay any fears Fed officials might have that they had gone from behind the curve to ahead of it, meaning that they were hiking into a recession. The labor market is still incredibly strong even if consumer spending and sentiment is weak. This gives the Fed space for a big hike at the end of the month by clearing away fears that higher rates will exact a big toll in terms of jobs. If employers are still hiring at this pace, it’s unlikely that they foresee a severe downturn ahead.
The bigger than expected jobs numbers may also encourage bigger rate hikes in another way. Fed officials fear that very low unemployment and very high demand for labor will lead to a wage-price spiral pushing inflation even higher or at least sustaining it at high levels for longer. Another big monthly print for jobs most likely has kept those worries alive. So a three-quarters of percentage point hike is likely locked in.
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A Back to Work Contraction?
Let’s leave aside for the moment the question of whether we are in a recession or not. That is mostly a debate about linguistics and authority centering on what exactly constitutes a recession and who gets to decide if we’re in one. That will be a fine debate to have at in a month or two, when we have second quarter economic growth data in hand and we hear from the official arbiters of recessions at the National Bureau of Economic Research.
What’s not in doubt is that we contracted in the first quarter and very likely contracted again in the second quarter. The Atlanta Fed’s GDPNOW—which tends to err on the optimistic side—says current economic data point to a 1.2 percent contraction in the second quarter. That’s after the blowout jobs numbers.
By the calculations of Jason Furman, the Obama administration’s top economic adviser turned Harvard economics professor, the economy has shrunk one percent in the first half of the year while employment has grown two percent. Furman points out that we’ve never seen anything like this disconnect of employment growth and output growth in data going back to 1948.
What’s going on? Furman raises three possibilities. First, perhaps stung by the difficulty in hiring in the post-pandemic period, employers may be “hoarding” workers in anticipation of a revival of demand. Even if businesses anticipated a short-lived and shallow recession in the near future, they might be scrambling to hire and retain now in anticipation of meeting demand afterward. Second, the data could just be wrong. Hiring might be slower than what the estimates are telling us, and output might be greater. Third, perhaps there has been a major downgrading in productivity due to so many people working from home and a lack of investment in workplaces over the last two years.
Our preferred theory is a variation on Furman’s third. It’s not that productivity is suffering from so many people working from home. It’s suffering from so many people returning to the office. After two or more years of working remotely either full-time or part-time, the transition back to working in person may be hurting output. That would require more workers to produce the same or even lower levels of output than pre-pandemic. This matches with lots of anecdotal evidence of people saying that they are getting much less done at work when they return to the office. At the very least, the timing on this works very well to explain why output growth and employment growth have become so disconnected as this year has gone on.
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The Week That Was
Here’s a brief rundown of this week’s economic data.
- FOMC Minutes: Hawkish but dated. Data arriving just days before the Fed meeting convinced all but one of the 18 participants in the FOMC meeting that a 75-basis point hike was needed. Key parts of that data was later revised in ways that might suggest the Fed’s urgency was unnecessary.
- JOLTS: Job openings fell for a second consecutive month from 11.7 million to 11.3 million in May. Prior to the current surge in demand for workers, that would have been an all-time high. It leaves roughly 1.9 job vacancies for every unemployed worker, an indicator of a red-hot labor market.
- S&P Global Services Survey: The decline in the reading for the services sector in June followed a low reading for manufacturing. Yet pricing pressures remain very high. This sets us up for a “bout of contraction.”
- Oil: Dropped below $100 a barrel on recession fears and bounced back above after jobs data eased those fears.
- Yield Curve: Still inverted, indicating a looming recession…but not giving any indication of when the recession could come.
- Factory Orders: New orders for goods manufactured in the U.S. jumped 1.6 percent in May compared with the prior month. Orders have been up for 12 of the last 13 months. But the numbers are presented in nominal dollars, so the increase is largely explained away by inflation. Even still, this shows consumers and businesses are willing and able to pay up for goods.
- Jobless Claims: Initial claims climbed to 235,000, defying consensus that they would fall to 230,000. This is pretty much a normal jobless claims number, which is to say not one that supports the idea that we are in a recession or will be very soon. Continuing claims remain near historic lows.
- Wholesale Inventories: Revised down from two percent to 1.8 percent. This suggests inventories will be a drag on second quarter GDP.
The Takeaway: As we put it the other day, everything screams recession except for the labor market. The labor market screams back that the expansion is continuing.
The Week That Will Be
- Wednesday is CPI Day: The consensus is for year-over-year inflation to pick up to 8.7 percent, largely due to higher food and gasoline prices. The Core Consumer Price Index, excluding food and fuel, is expected to dip to 5.8 percent from six percent.
- Thursday is PPI Day: The Producer Price Index, which measures what domestic businesses are paid for goods and services, likely remained as hot as last month, when it rose 0.5 percent month-over-month in both headline and core. The year-over-year gains—10.8 percent in May—will likely start to moderate because of base effects.
- Empire State Manufacturing on Friday: Expect the contraction to contract more. The estimate is for June’s -1.2 to go to -2.6.
- Retail Sales on Friday: Consensus is for a big jump after the May contraction, in part because of summer driving and vacation spending. This seems overly optimistic. We’re expecting a contraction after inflation adjustment, especially once gas stations are excluded.
- Consumer Sentiment, also Friday: A new record low is coming to a consumer near you! Everyone has a job, but everyone is feeling the inflation blues.