Everyone is talking about a recession but the labor market remains blazing hot.
The U.S. economy added 372,000 jobs in June and the unemployment rate held steady at 3.6 percent, the Department of Labor said Friday.
Economists had expected the economy to add 250,000 jobs and the unemployment rate to hold steady at 3.6 percent. The range of forecasts by economists surveyed by Econoday was between a gain of 190,000 to 350,000.
The private sector added 381,000 jobs in June, also more than expected. The change in total nonfarm payroll employment for April was revised down by 68,000, from 436,000 to 368,000, and the change for May was revised down by 6,000, from 390,000 to 384,000.
On average, the economy has added 456,000 jobs per month in 2022, an extremely high rate of payroll building.
In June, average hourly earnings for all employees on private nonfarm payrolls rose by 0.3 percent to $32.08. Over the past 12 months, average hourly earnings have jumped by 5.1 percent. In June, average hourly earnings of private-sector production and nonsupervisory employees rose by 0.5 percent, to $27.45. The wage gains were also higher than expected, an indication that the tight labor market continues to put inflationary pressure on the economy.
Average hourly earnings were revised up for May to show a 0.4 percent gain from April and a 5.3 percent gain from a year ago. Each was one tenth of a percentage point higher than the earlier estimate.
The labor force participation rate ticked down a tenth of a point to 62.2 percent.
The manufacturing sector saw a big jump in jobs, with payrolls rising by 29,000. The May figure was revised up to 23,000 from the earlier estimate of 18,000.
The economy rebounded from the pandemic much faster than expected. The labor market, in particular, quickly recovered much of the damage done by 2020’s lockdowns and social distancing, with the unemployment rate dropping much faster than expected. Demand for goods soared as American incomes were pumped up with stimulus money from various government programs and social distancing rules left people bereft of many of the leisure services activities–sports, concerts, travel, movies–that typically would have drained bank accounts.
The supply side of the economy could not keep up with the shift into spending on goods, especially with many exporting countries also struggling with the pandemic. China’s ports have suffered a series of closures under the country’s zero-tolerance policy for Covid. Various stages of the global supply chain to build semiconductors have also broken down, creating shortages that forced makers of everything from cars, to appliances, to phones to slow production.
Despite the signs that the demand side of the economy had recovered and the supply side was straining, the Federal Reserve continued to keep rates low, fearful of repeating past mistakes of withdrawing economic support too early. Similarly, the Biden Administration and Democrats led by House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Chuck Schumer (D-NY) pushed through an enormous spending program called the American Rescue Plan.
The result: an explosion of inflation that Fed policymakers and Biden administration initially insisted would be transitory. But as the supply chains remained stressed and prices continued to climb last year, Fed officials abandoned the word transitory and scrambled to pivot to an inflation-fighting stance. Last month, the Fed hiked its interest rate target up by 0.75 percentage points, the biggest hike since 1994. Minutes from the Fed’s June meeting showed officials were startled that the Consumer Price Index jumped by 8.6 percent in May, the most in over 40 years, and inflation expectations had appeared to surge higher.
Outside the labor market, the rest of the economy has been showing signs of strain. The economy shrank 1.6 percent in the first three months of the year, largely due to an unusually high trade deficit and businesses shedding inventories built up over the holiday season. Consumer spending was weaker than expected in the first quarter and the Department of Commerce recently downgraded its estimate from a 3.1 percent pace of growth to 1.8 percent. Wholesale inventories, a key feature in GDP measurements, rose by 1.8 percent in May, the government said Friday, a downward revision from the preliminary estimate of 2.0 percent growth and an indication that inventories could subtract from overall growth in the second quarter.
The weakness has intensified in June and early July and the economy appears to be contracting again. The University of Michigan’s measure of consumer sentiment sunk to a new record low in June. Consumer spending rose just 0.2 percent in May, the latest data available. Adjusted for inflation, this dropped 0.4 percent. Spending on long-lasting goods fell by an unadjusted 3.2 percent from the prior month and 3.5 percent after inflation. Nondurable goods spending fell 0.6 percent after adjusting for inflation.
Manufacturing is in contraction in much of the country, if the regional Fed reports are to be believed. New business is drying up for both services and manufacturing even though prices keep rising, according to surveys conducted by S&P Global, pointing toward a ’bout of stagflation.’ Construction seems to have rolled-over as mortgage rates hit home affordability. The Atlanta Fed’s GDP Now tracker indicates the economic data so far points to the economy shrinking 1.9 percent. Most Americans believe we are already in a recession, although that view is shared by only a tiny share of economists. Many economists think the odds of a recession next year are somewhere in the neighborhood of 40 percent to 50 percent.
At the end of May, there were 11.3 million job vacancies, the government reported this week. Prior to the pandemic, the highest number of openings picked up by the government’s Job Opening and Labor Turnover Survey was 7.4 million in 2019. The record high was from March of this year, at 11.9 million. With the May figure, there were around 1.9 jobs for every unemployed person—close to the record high.