Scorching Summer Job Heat Means More Rate Hikes

The post-COVID labor market recovery is like this summer’s weather: SCORCHING. The government reported that 528,000 jobs were created in July, more than twice the consensus estimate. The results mean that the total number of jobs have returned to their February 2020 pre-pandemic levels. The monthly gains were broad-based, though post-pandemic performance has favored some sectors much more so than others.

For example, leisure and hospitality is down 1.21 million jobs since February 2020, recouping about 85 percent of the jobs lost in March and April 2020, and government employment is 597,000 lower than its pre-pandemic level. Retail trade, construction and manufacturing employment are above pre-pandemic levels (+208K +82K, +41K, respectively); while the professional and business service sector has added almost one million more positions (+986K) than it had in February 2020 and transportation and warehousing is 745,000 above its February 2020 level.

The unemployment rate ticked down to 3.5 percent, matching the pre-pandemic 50-year low, though that is partially due to a slight drop in the participation rate, which remains below its Feb 2020 value of 63.4 percent. While almost all of the prime age workers (ages 25-54) have returned to the labor force in the same numbers as before COVID, older Americans are not rejoining the labor force in huge numbers and the continued low level of immigration “suggest that participation may not reach the levels hit pre-pandemic,” according to Diane Swonk, Chief Economist at Grant Thornton.

The strength of the report, and the re-acceleration of job gains, is more important than evidence that June job openings fell to their lowest level in nine months and makes “a mockery of claims that the economy is on the brink of recession,” according to analysts at Capital Economics. (As a note, the reporting on JOLTs bordered on silly, while the number of openings fell from 11.3 million in May to 10.7 million in June, openings remain higher than they were a year ago and have seen a more than 50 percent increase from before the pandemic.) “The U.S. labor market remains hot as demand is still elevated and joblessness is low,” says Nick Bunker, director of economic research at Indeed Hiring Lab. He wrote that before the July employment report, noting that “employer demand for workers remains strong.”

Of course, with two quarters of negative GDP growth in 2022, Bunker understands that the recession worries are elevated. But for those who are apoplectic about the R-Word, Bunker has a message: “The outlook for economic growth may not be as rosy as it was a few months ago, but there’s no sign of imminent danger in the labor market.”

The sizzling report also means that the Fed is all clear to keep raising interest rates when the central bank meets in September. The upcoming July Consumer Price Index will likely underscore that inflation should be the Fed’s focus and that the labor market can withstand a slowdown, even if that means the unemployment rate were to rise to 4 percent.

One last note about the July jobs report: average hourly earnings rose by 5.2 percent from a year ago. While the number is historically high, it is much lower than the current 9.1 percent inflation rate. Many Americans are using excess pandemic savings to supplement income amid the current period of high prices, while others have been borrowing to fund the gap. Credit card balances jumped by $46 billion in the second quarter from the first quarter, according to the Federal Reserve Bank of New York, that’s a 13 percent increase from a year ago, the largest annual increase in more than two decades. Not surprisingly, card usage is rising the most for younger consumers and those who already have low credit scores.