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PNC Chief Economist Gus Faucher: Huge July Jobs Increase as Employment Back to Pre-Pandemic Level;

Michigan Business Network
August 8, 2022 1:00 PM

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Decline in Unemployment Rate to Lowest Rate in More Than 5 Decades Complicates Fed's Task

  • The U.S. economy added a very strong 528,000 jobs in July, far above consensus expectations, with upward revisions to job growth in May and June as well. 
  • U.S. employment is now above its pre-pandemic level. 
  • The unemployment rate fell to 3.5% in July, matching the lowest rate since 1969. 
  • The labor force contracted in July; the job market is extremely tight right now. The tight labor market pushed up average hourly earnings by 0.5% over the month. 
  • The strong jobs report could push the Federal Reserve to raise interest rates more aggressively. 
  • Market reaction was negative on concerns of more Fed tightening, with interest rates up and stocks down.

Job growth surprised far to the upside in July, with the U.S. economy adding 528,000 jobs over the month, about doubling the consensus expectations for an increase of 250,000. The unemployment rate dropped 0.1 percentage point to 3.5%; this matches the lowest unemployment rate since 1969; the last time the unemployment rate was this low was rate before the pandemic. 

Total employment in July as measured in a survey of households was 152.536 million, now somewhat above its pre-pandemic level. The economy has more than fully recovered the 22 million jobs lost (14% decline) in March and April 2020 as the pandemic came to the U.S., a remarkable achievement given the depth of the job losses. 

In addition to the huge July jobs number, job growth in May and June was revised higher by a combined 28,000. June job growth was revised up to 398,000 from 372,000, while May job growth was revised higher to 386,000 from 384,000. Over the past three months the economy has added an average of 437,000 jobs per month, well above long-term growth in the labor force. Private-sector employment rose by 471,000 in July, while government employment increased by 57,000. 

The unemployment rate fell to 3.5% in July, from 3.6% in each of the four previous months. The unemployment rate has not been lower than this since 1969; it was at 3.5% at the beginning of 2020, right before the pandemic disrupted the economy. The unemployment rate peaked at 14.7% in April 2020. 

Employment in a survey of households (different from the survey of employers) rose by 179,000 in July; this increase was welcome after household employment fell in two of the previous three months. The labor force participation rate—the share of adults working or looking for work—fell in July to 62.1% from 62.2% in June, with the level of the labor force declining by 63,000. The job market is extremely tight right now, and the decline in the labor force participation rate is worrisome. The labor force participation rate has been stuck just above 62% throughout 2022; although this is up from around 60% in April 2020, it is down from 63% right before the pandemic. The labor market is structurally tighter than it was before the pandemic. 

Private goods-producing industries added 69,000 jobs in July, with an increases of 32,000 in construction and 30,000 in manufacturing. The increase in construction employment occurred despite a slowing in the housing market as the Federal Reserve raises interest rates to combat the highest inflation in 40 years. Private service-providing industries added 402,000 jobs in July, with gains of 122,000 in education/health services, 96,000 in leisure/hospitality services, and 89,000 in professional/business services. 

Growth in private-sector average hourly earnings was a solid 0.5% in July from June, after increases of 0.4% in May and June. On a year-ago basis average hourly earnings were up 5.2% in July, the same pace as in June, but down slightly from March through April. The tight labor market is driving strong wage growth, although it has lagged behind very high inflation. The average workweek was unchanged at 34.6 hours. With more jobs, higher wages, and an unchanged workweek, total earnings rose a huge 0.9% over the month, far outpacing inflation of around 0.3% as gasoline prices plunged over the month (July CPI to be released August 10). 

Normally a jobs report like this would be great news: a huge increase in employment, the lowest unemployment rate in decades, a big increase in wages. But when the Federal Reserve is concerned about very high inflation and an economy that’s too strong, the July jobs report is a big problem. The Fed had been hoping that interest rate increases so far in 2022 would cool off the labor market and remove wage pressures. And there are some indications that the economy is softening: real GDP fell in the first and second quarters, and the housing market is slowing. But the labor market is extremely tight, far tighter than the Fed would like. Therefore, more increases in the central bank’s key policy tool, the fed funds rate, are coming. In turn, this raises the risk that the Fed could be forced to raise rates to a level that would lead to a recession in the U.S. economy in 2023 or 2024. Today’s jobs report increases the likelihood that the Federal Open Market Committee raises the fed funds rate by 0.75 percentage point, rather than 0.5 percentage point, at its next meeting on September 21. But there is another jobs report, and a couple of more inflation readings, between now and then, so the situation could change. 

Certainly, with job growth this strong, the U.S. economy is not in recession in the summer of 2022, despite the decline in real GDP in the first half of the year. Employers continue to hire and wages continue to rise, both very strongly. The biggest problem for the labor market remains demand that is far outstripping supply. 

The market reaction was negative given that the very strong July jobs report increases the likelihood of the Fed taking stronger steps to slow economic growth. The yield on the 10-year Treasury note jumped by more than 0.1 percentage point in response, to 2.83%, and the yield on the 3-month T-bill is up slightly to 2.50%. S&P futures are down about 1% ahead of the market open. The price of a barrel of West Texas Intermediate crude oil is down by about 0.8%, to below $88. The U.S. dollar has strengthened 1% against a basket of currencies based on expectations for more Fed tightening.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

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