Just a Job to Do: Assessing the Labor Market

On a day when many were still enjoying the revelry of the Fourth of July holiday, the Bureau of Labor Statistics (BLS) released the June jobs report. In keeping with recent releases, it provided a mixed-to-weakening picture of the labor market. The BLS' establishment survey showed payroll growth of 206K relative to the 190K that was expected; however, downward revisions to the prior two months were a hefty 111K. The BLS' household survey—from which the unemployment rate is calculated—did show a gain in jobs to the tune of 116K, which is an improvement from May's decline of 408K. Yet, as shown below, there continues to be a yawning 3.8 million gap between the establishment and household surveys' tally of job growth over the past two years.

The establishment survey tends to overstate job growth during economic slowdowns, in part due to overly optimistic estimates of new business births. In addition, the annual benchmark revisions coming in the first quarter of 2025 will likely bring downward revisions to the prior year's payrolls of an estimated 70-80K per month. This is based on what can be gleaned from the latest quarterly census survey. It's also the case that household employment may be understated in part due to immigrations' impact. Combined, it leads to our conclusion that the real employment story may be somewhere in between the two BLS surveys' findings.

Payroll gains were concentrated in education/health services and government, while losses were concentrated in professional and business services, as shown below. The gains in non-education state and local government seem to contradict anecdotal evidence of many states' increasing budget shortfalls and spending restraint. Leaning weaker: a significant decline of nearly 49K in temporary help employment, a 28K drop in full-time employment, and a 50K jump in part-time employment.

There was yet another tick higher in the unemployment rate to 4.1%. As shown below, it is up from this cycle's low of 3.4%, while it's also continued to climb above the 36-month moving average. As you can see, every time that cross has occurred historically, it's been a clear recession indicator. That said, this cycle has bucked so many historical trends with regard to recession signals, so the jury remains out on this one. Worth watching is also long-term unemployment (defined as more than 27 weeks), which continues its trek higher. At 22.2% of total unemployment, it's a new post-pandemic cycle high.

The labor force participation rate (LFPR) ticked up slightly, with a larger gain for prime-age, as shown below. In particular, the LFPR for women continues to enjoy a stronger rebound in this cycle relative to the LFPR for men. The aforementioned tick higher in the unemployment rate was for a "good" reason in that it reflects higher labor force participation, not a decrease in employment.

Average hourly earnings (AHE) ticked down to 3.9% year-over-year, which was in line with the consensus estimate and down from May's 4.1% reading. On the margin, this is good news from the perspective of inflation and Federal Reserve policy; but AHE growth remains well above the 2.5%-3.0% pre-pandemic range.

The dominant question with all things labor data is whether the recent soft patch is indicative of a continued normalization from pandemic distortions, or something more sinister (and indicative of a recession). One way to see confirmation that we are experiencing the former is via the monthly job openings data that come from the Job Opening and Labor Turnover Survey (JOLTS).

As shown in the chart below, when the labor market was experiencing a strong recovery as the global economy was reopening, the quits rate—which measures workers' confidence in leaving their job and easily finding a new one—soared to an all-time high, underscoring immense labor tightness. It has since come down to pre-pandemic levels; and given the layoffs and discharge rate hasn't surged, it supports the notion that the market is normalizing. A continued convergence between both series would be more worrisome, however.

Corroborating the normalization story is the roundtrip done by the ratio of job openings per unemployed individuals. As shown in the chart below, the ratio climbed rapidly in 2021 and 2022 (again, to an all-time high) as companies' demand for labor soared, helping put immense upward pressure on wages and inflation—thus pushing the Fed to aggressively raise rates. We've previously discussed that this indicator arguably overstates the tightness in the labor market, but given it remains a favorite among Fed officials, we think it's important to monitor.

The unfortunate aspect of the JOLTS data is the lagged nature of it (for example, we won't get June job openings data for another month). As such, we think one of the best leading labor market indicators to watch is jobless claims—both initial and continuing. As shown in the chart below, claims have been moving higher this year, with the pace really picking up in May. Worth noting is that the current trend is consistent with what we saw in 2023, 2019, and 2018; so, the uptick isn't yet a surefire recession signal.

That said, though, continuing jobless claims—which measure the number of individuals continuing to file for unemployment benefits—have risen to their highest since November 2021. This likely underscores the reduction in firms' demand for labor and subsequent difficulty individuals are having in finding other jobs; the so-called "rehiring rate" is moving lower.

We've been of the view that labor market trends have become at least as important as inflation trends in guiding the Fed in terms of when to start easing monetary policy. There was an interesting knee-jerk reaction in the fed funds futures market immediately after the jobs report release: Given better-than-expected payrolls, expectations for a start to rate cuts at the September Federal Open Market Committee (FOMC) meeting actually moved lower relative to before the release of the jobs report. However, after the details of the report were assessed, expectations jumped higher and as of this writing, are up to about a 72% probability per the CME Fed Watch Tool.

The net is that the Fed is likely to remain "patient" (their new favorite descriptor) for now; but any further weakening in the labor market could provide the green light for the Fed to begin easing policy in advance of inflation hitting their 2% target.