2021. (Photo by Justin Sullivan/Getty Images)Getty Images
Inflation has improved significantly from its peak, but wage growth remains the main threat to the Federal Reserve’s ability to end its hike in short-term yields. Therefore, last Friday’s jobs report is crucial for the outlook for monetary policy and the economy. On the surface, the rapid rise in the unemployment rate from 3.5% to 3.8% seems to paint a picture of a rapidly deteriorating labor market, but further nuance is needed here.
US Unemployment Rate
Glenview Trust, Bloomberg
The increase in unemployment was more a healthy increase in the labor force than a decline in employment. This development raises hopes that wage growth may moderate as a result of the additional labor supply and not due to falling labor demand that accompanies an economic slowdown.
labor force participation rate
Glenview Trust, Bloomberg
The payroll report showed a better-than-expected number of new jobs for the month at 187k, but a downward revision of 110k to the last two-month gains more than offsets the monthly figure. The US Household Survey research series, which adjusts the Household Employment Survey to make it comparable with the Payroll Report, supports the conclusion that employment growth is slowing. A complication in the analysis is the Yellow Trucking bankruptcy and the Hollywood workers’ strike slowed job growth. Goldman Sachs estimates that without these two factors, job growth would have been 50k higher.
Monthly employment growth
Glenview Trust, Bloomberg
Wage growth moderated to 4.3% yoy and rose at a below-expected 0.2% mom rate.
Average hourly earnings
Glenview Trust, Bloomberg
Those who would argue for an early increase in new hires would point to the increase in average weekly hours. The Atlanta Fed is currently estimating third-quarter GDP growth at a whopping 5.6%. True GDP should be below that level, but even halving that number keeps the economy growing above trend, and GDP growth is typically accompanied by hiring.
Average weekly hours
Glenview Trust, Bloomberg
Earlier last week, the JOLTS report showed job vacancies have fallen to their lowest level since early 2021.
Total number of job openings in the US
Glenview Trust, Bloomberg
Last week’s data supports the case for a slowdown in inflation and allows the Federal Reserve to end rate hikes as inflation, reflected in Treasury yields falling from their recent highs. Moreover, the likelihood of this succeeding while avoiding a recession has increased based on last week’s data releases.
US Treasury yields
Glenview Trust, Bloomberg
Last week’s jobs report confirmed the likelihood that the near-term risk of a recession remains very low. The data points to a softening in the labor market which, if the trend continues, should allow further progress in the fight against inflation without further interest rate hikes. Based on these reports, the Federal Reserve was not expected to take any action at its September meeting. The bond market also expects no rate hike at the November meeting, which is by no means certain and will continue to alert market participants to future jobs and inflation numbers.
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I am Chief Investment Officer of Glenview Trust Company, which provides investment management, estate and financial planning to affluent families. I appear frequently on US and international television and have been featured on ABC, Bloomberg, Bloomberg Asia, CNBC, CNBC Asia, Fox Business and NHK World. Previously, I was Global Chief Investment Strategist for PNC Asset Management Group. With over $140 billion in assets under management at PNC, I acted as the key driver of asset allocation and model portfolio construction for high net worth individuals, family offices and institutional investors. I began my career on Wall Street as a financial analyst at Salomon Brothers, where I first encountered Warren Buffett. I have a bachelor’s degree from the University of Dayton and an MBA from the University of Pittsburgh. In addition, I have earned Chartered Financial Analyst® (CFA®) and Chartered Market Technician (CMT) designations.
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