No Sign of Recession in June Jobs Report; Fed Expected to Hike Short-Term Rate by 0.75%

• The U.S. added a solid 372,000 jobs in June and the unemployment rate held steady at 3.6%.
• Some sectors are contracting and shedding jobs, but displaced workers are quickly finding new ones in other parts of the economy amid strong labor demand.
• Employment rose 375,000 per month in the second quarter of 2022 after 539,000 per month in the first quarter, demonstrating that the U.S. economy was not in a recession in the first half of 2022 (See chart).
• However, job growth will slow in the second half of 2022 and the risk of a recession is elevated.
• The Federal Reserve is expected to raise the federal funds rate by three quarters of a percentage point at their July 27 meeting, to a range of 2.25%-to-2.50%.
The U.S. economy added 372,000 nonfarm payroll jobs in June, beating the 265,000 consensus forecast and Comerica’s forecast of 175,000. Job growth in April and May was revised down a net 74,000. After revisions, May added 368,000 jobs and April 384,000. In June, private employers added 381,000 jobs. Goods-producing industries saw solid growth, with manufacturing up 29,000 and construction 13,000. In the service-providing industries, there were big job gains in professional and business services, up 74,000; health care, up 56,700; and leisure and hospitality, up 67,000, including 40,800 more food services and drinking place jobs and 14,800 more in accommodation. Other sectors with job gains included information (movies, print and broadcast media, etc), up 25,000; social assistance, 21,100, and educational services 18,200 (this is seasonally adjusted data, so indicates education employment fell less than it typically does in the summer months). Warehousing and storage jobs rose 17,500; wholesale trade 16,400; and retail 15,400. Public employment fell 9,000, with a 13,000 drop in federal employment partially offset by small local government gains.

High inflation and the shift of consumer spending from goods to services is showing up as jobs losses in affected sectors. Employment in nondepository credit intermediation, which includes nonbank mortgage lenders, fell 9,300 from May. And while retail employment was up on the month, it is still down 50,000 from its peak in February; lower- and middle-income consumers are cutting back on discretionary spending, and households with money to spare are spending more on experiences like dining out and travel, not products that are sold in stores. Even so, extremely strong labor demand in the rest of the economy means that most workers who are losing jobs in shrinking sectors are finding new ones quickly.

The unemployment rate held steady for a fourth consecutive month at 3.6% in June, matching the consensus’ and Comerica’s forecasts. It sits a hair’s breadth from the 50-year low of 3.5% reached in late 2019 and early 2020. However, the details of the household survey were a little softer than the headline. The labor force fell 353,000 from May and employment fell 315,000; the number of unemployed fell 38,000. The labor force participation rate edged down to 62.2% from 62.3% in May; it’s been between 62.2% and 62.4% since January, up from a 61.4%-to-61.9% range in 2021, but below the pre-pandemic high of 63.4%. The unemployment rate for White and Asian Americans rose on the month to 3.3% from 3.2%, and to 3.0% from 2.4%, respectively. The unemployment rate for Black Americans fell to 5.8% from 6.2%, and the unemployment rate for Hispanic or Latino Americans was unchanged at 4.3%. The unemployment rates for men and women over the age of 20 were equal in May and June, falling to 3.3% from 3.4%; the unemployment rate for teenagers of both sexes rose to 11.0% from 10.4% in May, 10.2% in April, and 10.0% in March. The U-6 unemployment-and-underemployment rate fell to a record low of 6.7% in June from 7.1% in May. The unemployment rate is the number of people who don’t have a job and actively searched for one in the past four weeks, as a share of that group plus the employed. U-6 is a broader measure of unemployment and unemployment, and also includes people who are working part-time because they can’t find full-time work, and people who want a job but aren’t actively searching for one. Average hourly earnings rose 0.3% on the month. From a year earlier, average hourly earnings growth slowed to 5.1% from 5.3% in May, 5.5% in April, and 5.6% in March. Wages are rising faster at the lower end of the income distribution: Average hourly earnings of production and nonsupervisory employees rose 0.5% on the month and 6.4% on the year in June. The average workweek in the private sector was unchanged on the month at 34.0 hours.

The jobs report demonstrates that the U.S. economy was not in a recession in the first half of the year. Real GDP did contract 1.6% annualized in the first quarter, and the Federal Reserve Bank of Atlanta’s nowcast of real GDP for the second quarter is currently tracking at a 1.2% annualized drop (The New York and Cleveland Feds also publish GDP nowcasts, which show positive growth, but it’s Atlanta’s that has captured Wall Street’s imagination). Two consecutive quarters of declining real GDP are often thought of as a convenient shorthand for recession. But the jobs data tell a totally different story. With robust job growth and a modest shortening of the average workweek, aggregate hours worked by private workers rose 2.6% annualized in the second quarter and 3.4% annualized in the first. It seems very unlikely that output per hour fell enough over the last six months for total production to be down as much as GDP suggests. It would be no surprise to see the first quarter’s contraction in GDP revised to growth as statistical agencies receive more complete information; GDP is hard to measure in real time and subject to many revisions. After June’s gain, employment is down 524,000 from the pre-pandemic high, less than two months’ increase at the second quarter’s 375,000 monthly average. But job growth is set to slow in the second half of 2022. The two benchmark surveys of private employers, the ISM manufacturing and services Purchasing Managers Indexes (PMIs), show a majority of businesses cut headcount on net in June. The relationship between the PMI survey and job growth isn’t one-to-one, but it does make it likely that hiring will slow in coming months—with the most pronounced softening in formerly “essential” retail sectors, the tech industry, housing and adjacent sectors, and some parts of manufacturing. Headwinds in these industries mean that payroll job growth will likely slow to about 225,000 per month in the second half of 2022.
After monthly job growth averaging 375,000 over the last three months, the Fed is likely to raise the federal funds target another three quarters of a percent at their meeting late this month, to a range of 2.25-to-2.50%. After the jobs report, financial markets price in the fed funds rate rising to a range of 3.25%-to-3.50% by the end of this year, then to 3.50%-to-3.75% in the second quarter of next year, followed by cuts to a range of 3.00%-to-3.25% by the end of 2022. Comerica’s interest rate forecast is slightly different, with the Fed raising the fed funds target to 3.25%-to-3.50% by the end of this year, then holding it unchanged through December 2023.

Bill Adams is senior vice president and chief economist at Comerica.

Payrolls Growth Solid Economic Chart - July 2022
Source: Comerica