Labor Market Shows Signs of Slowdown with Revised Downward Job Gains

250k Jobs Revised Down

Aug 09, 2023

U.S. Economy Jobs Falling Short of Expectations

The U.S. Labor Department's recent report revealed that the U.S. economy added 187,000 jobs in July falling short of economists' predictions of 200,000. The average employment growth in 2020 was around 400,000 jobs per month, highlighting a significant decline. Additionally, the economy created 49,000 fewer jobs in May and June than previously reported.

The unemployment rate dipped to 3.5% in July from 3.6% in June, remaining near a half-century low. Initial claims for state unemployment benefits rose by 6,000 to a seasonally adjusted 227,000 for the week ending July 29. Despite this minor uptick, the labor market remains robust, with layoffs dropping to an 11-month low in July.

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Revisions Downward

The job gains for May and June were revised lower, suggesting a potential slowdown in labor demand following the Federal Reserve's interest rate hikes. June’s revision dropped 24,000 jobs, from 209,000 to 187,000 jobs. May’s revision dropped 25,000 jobs, from 306,000 to 281,000 jobs. Year to date, job revisions have been around 250,000 less jobs than initially reported. The moderation in hiring could be attributed to companies struggling to find workers, as there were 1.6 job openings for every unemployed person in June.

The Federal Reserve

The Federal Reserve, which monitors job growth and inflation closely, is unlikely to remove future interest-rate hikes from consideration. The Fed has been seeking moderate growth in the labor market and a better balance between supply and demand before deciding on interest rate adjustments. While the labor market continues to show resilience, the latest report suggests that labor-market pressures are weakening.

The likelihood of a September interest-rate hike, according to the CME FedWatch Tool, is currently at 12.5%. This dropped from 13.5% in less than a week after the jobs report release. The odds of a rate hike in November stand at 29.5%, while the odds of an increase in December are at 26%. If no clear direction emerges from the data, it is expected that the Fed will maintain its current stance.

Jobs Report Breakdown

The labor force participation rate exceeded expectations by reaching 62.6%, surpassing the projected rate of 61.5% for this year. However, it still falls short of the pre-pandemic rate of 63.3% and is significantly below the peak of 67.3% achieved in early 2000. Among prime-age workers (ages 25 to 54), the participation rate experienced a slight decrease to 83.4% after hitting a 21-year high in June. Despite this decline, the share of prime-age individuals with employment rose to its highest point in over 22 years. Furthermore, the employment-to-population ratio, a crucial measure of an economy's ability to generate jobs, saw a marginal increase from 60.3% in June to 60.4% in July.

There was a notable uplift in the average hourly earnings for private, nonfarm workers in the US, reaching $33.74. This marked a 0.4% growth from June and a 4.4% increase from the previous year, surpassing economists' predictions. They had anticipated a 0.3% growth from June and a 4.2% increase from the previous year. Regrettably, there was a slight reduction in the average weekly hours worked by 0.1 hour, resulting in the new average of 34.3 hours per week.

The decline in average work hours indicates that companies are becoming more cautious and reducing employees' working hours in response to a slowdown in economic activity. This cautious approach may be influenced by the increase in hourly wages, which has been a significant factor contributing to persistent inflation.

Despite the decrease in average work hours, employment continued to rise in several industry sectors, such as healthcare, social assistance, financial activities, residential housing, and wholesale trade. However, the overall employment diffusion index, which measures the number of industries adding jobs on a monthly basis, dropped to 57.2 from 72.2 compared to a year ago. This reading represents the second-lowest level recorded since the Covid pandemic recession.

The healthcare sector proved to be the frontrunner in job growth, recording a substantial increase of 63,000 jobs. Additionally, financial activities experienced a noteworthy rise of 19,000 new positions, while the construction sector contributed an additional 19,000 jobs, primarily propelled by hiring in residential specialty trade contractors and nonresidential building construction. Despite experiencing a slower pace of hiring when compared to previous months, the leisure and hospitality sector still managed to add 17,000 jobs to its workforce.

The lack of available homes for sale continues to have a significant impact on the economy, with Redfin reporting a staggering 21.3% decrease in new listings compared to the previous year. This decline can largely be attributed to the rising mortgage rates, which have affected both the demand for homes and the supply in the housing market.

Despite these challenges, the real estate sector has actually experienced some positive growth. In the month of July alone, it added 4,500 jobs, with the residential construction industry contributing an impressive 7,800 jobs. This surge in employment can be attributed to the increasing demand for new housing, driven in part by homeowners who are reluctant to sell their properties due to the historically low mortgage rates.

This heightened demand for new homes has subsequently led to a noticeable rise in single-family housing starts, indicating the commencement of construction on new residential properties. Although the current figures for unadjusted single-family starts are still lower than those of the previous year, they have remained relatively robust throughout the month of June as per the census data.

MARKET RESPONSE

The release of the jobs report had an impact on both the economy and the stock market. Notably, the yield on the 10-year Treasury note witnessed its most substantial daily decline since May, signaling a significant shift in investor sentiment. The 10-year Treasury yield plummeted to 4.04% recording a decline of 0.15 percentage points.

The jobs report also wielded influence over the stock market, with an initial surge followed by a subsequent dip. Specifically, the Dow Jones Industrial Average witnessed a decrease of 150.27 points, equivalent to a 0.43% decline, while the broader S&P 500 Index and the tech-heavy Nasdaq experienced respective decrements of 0.53% and 0.36%.

The jobs report also coincided with the second quarter earnings season, which started off strong but has since fallen below expectations. This has led to a drop in year-over-year earnings growth, which measures the percentage change in earnings from one year to the next. A decline in this metric can indicate slowing economic growth and can negatively impact investor sentiment.

Wrap Up

The Jobs report in July fell short of economists' predictions, highlighting a potential slowdown in labor demand. Despite this, the unemployment rate remains near a half-century low. The decline in average work hours and the increase in hourly wages suggest that companies are becoming more cautious in response to economic uncertainty and overall the report suggests a potential moderation in labor-market pressures.

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