June’s Jobs Report Comes in Stronger Than Expected

The June nonfarm payrolls report from the U.S. Labor Department showed that the economy added 372,000 jobs during the month while the unemployment rate held at 3.6%. Crucially for stock-market investors, buried in the report was a sign that inflation may be slowing as average hourly earnings rose less than economists had forecasted, rising 0.3% from the previous month and 5.1% from the year-ago period. This was a decline in wage gains of 5.3% in May and 5.5% in April.

The largest negative in the report was that the labor force participation rate, defined as a percentage of the population that is either working or actively looking for work, dropped to 62.2%, versus economists’ expectations of 62.4% and 62.3% in May. The decline in the participation rate was due in large part to a decline in Black and Asian workers. Minority workers tend to be the last hired and first fired as was the case during the 2020 pandemic. The labor force shrank by roughly 350,000 workers during the month.

Economists surveyed by Dow Jones had been looking for nonfarm payrolls to expand by 265,000 and the unemployment rate to remain stable at 3.6%. Importantly, there are signs that the job market remains healthy and competitive. Furthermore, job gains were broad-based and across industries. Health care and social assistance services added the most jobs as positions increase by 77,800 while professional and business services added 74,000 jobs during the month. The government sector continued to lag and was the only sector where job losses were seen.

Also buried in the report were downward revisions for the total number of jobs added for the months of May and April. New estimates from the Labor Department cut jobs added by 74,000 for the two months. With the heady recent performance in the labor market, total jobs created with the revised figures now stand at 1.12 million for the second quarter of 2022, but well below the 1.62 million additions in the first quarter. Total payrolls remain slightly over half-a-million jobs below the peak reached in February 2020. At the current pace and projections from economists, a new high for total payrolls could be recorded in September.

The stock market was flat, with the S&P 500 up 0.1% in the mid-morning session, and bond yields rose moderately. The yield on the 10-year U.S. Treasury Note was up to 3.06%, rising 5.6 basis points from yesterday’s close. 10-year notes started the year trading at a yield of 1.51% and have now almost doubled in the first five months of the year. The more rate-sensitive 2-year yield of U.S. Treasury notes increased by a more robust 8 basis points, trading at close to 3.1%. Given that the yield on shorted dated paper is now higher than the yield on longer-dated debt, the yield curve is “inverted” once again. An inverted yield curve is generally seen as a leading indicator of a recession.

One of the negatives of the robust jobs report may be that the Fed could be more inclined to continue with its pace of 75 basis points rate hike for the month of July. While the market was already pricing in a 75bps hike during the FOMC’s meeting later this month, the probability of a 50bps move in September too now seems considerably higher. Next week Wednesday’s CPI report would a key indicator in gauging how much front-loading the Fed is likely to undertake to bring inflation under control.

Anecdotally, companies in some sectors have also highlighted that they will either slow or freeze hiring in the short term, while a select few companies have started laying-off employees to get ahead of a possible recession. Companies in the technology and communications sectors, especially, are pausing hiring, while some in the construction and financial services space have started rationalizing costs. Despite these concerns, the labor market remains healthy, and today’s report did not raise alarms about an upcoming recession that could either be deep or prolonged.

This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.