Labor Market Still Running Hot, Challenging Fed’s Inflation Goals

3 Mins read

The Federal Reserve’s hopes for a reduction in inflation may be hindered by the current state of the labor market, which shows no signs of cooling down. Recent data from the Bureau of Labor Statistics, anticipated by ADP’s payroll company, reveals that job growth far exceeded expectations in June. With private-sector employers adding 497,000 jobs last month, nearly double the estimated 250,000 forecasted by economists surveyed by FactSet.

Although economists surveyed by FactSet still predict a positive job growth of 215,000 nonfarm private positions in June, with an overall gain of 205,000 nonfarm jobs, ADP’s report casts doubt on these conservative projections.

ADP’s chief economist, Nela Richardson, acknowledged that strong hiring typically occurs in June and emphasized that last month followed suit. The Bureau of Labor Statistics’ latest report on job openings and turnover also does not indicate a significant cooling of the labor market. Despite a slight dip to 9.8 million job openings in May compared to the forecasted 9.9 million, there was still a 40% increase from pre-pandemic levels.

The pace of hiring remained relatively steady, with 6.1 million new hires recorded in May. Additionally, the number of people voluntarily quitting their jobs, which ZipRecruiter’s chief economist Julia Pollak considers a more reliable indicator of labor market strength, increased by 250,000 to reach four million in May.

It is evident that the labor market’s robust performance poses a challenge to the Federal Reserve’s efforts to tame inflation. To achieve the desired outcome, a closer alignment between the supply of labor and demand is necessary. However, the current data suggests that this objective remains elusive as the job market continues to defy expectations.

Labor Market Trends

The latest Jolts report indicates that the labor market is gradually slowing down, signaling a cooler yet still robust job landscape compared to a year ago. In May, approximately 5.9 million workers parted ways with their employers, a number that remained relatively stable. Out of this, around 1.6 million employees faced layoffs, experiencing a slight decline from April. This downward trend is expected to continue in the coming months. Challenger, Gray & Christmas, an outplacement firm, reported 80,089 layoff announcements in May, which significantly decreased to 40,709 in June.

These numbers do not bode well for Federal Reserve officials aiming to cool down the labor market in an effort to combat inflation. As long as there are abundant job opportunities and employers attract workers with higher wages, it is unlikely that inflation will moderate. Consequently, the Fed might have to persevere with their strategy of aggressive interest rate hikes.

The market response to this data was evident, as stock prices experienced a decline and bond yields increased. The S&P 500 was down by 0.8% during early Thursday afternoon, while the Dow Jones Industrial Average fell by 1.1%. Similarly, the Nasdaq Composite witnessed a loss of 0.9%.

However, the labor market situation goes beyond these headline figures, highlighting notable nuances that could indicate the impact of the Fed’s rate hikes. ADP, for instance, observed job declines in industries sensitive to interest rates during June. Hiring among large employers also continues to witness a reduction.

In a somewhat positive development, initial claims for unemployment benefits exceeded expectations at 248,000 for the week ending July 1st. Nonetheless, despite a gradual increase in jobless claims throughout the first half of the year, the overall rate remains historically low.

Job Market Shows Uneven Pace of Hiring

The latest data from ADP reveals that the pace of hiring remains uneven across industries. While lower-paying sectors like leisure and hospitality are adding jobs, higher-wage industries like information and finance are experiencing cutbacks.

Federal Reserve (Fed) officials have also expressed concerns, suggesting that the reported job growth may be weaker than what the payroll employment numbers indicate. The minutes from the June Federal Open Market Committee meeting noted that employment growth is projected to slow further, aligning with predictions of below-trend economic growth.

On a positive note, wage growth appears to be slowing down. ADP’s report shows a significant slowdown in pay increases. Job switchers experienced a growth rate of 11.2% in June, the slowest pace since October 2021. Meanwhile, those who stayed in their positions saw a 6.4% year-over-year pay increase, slightly lower than the 6.6% recorded in May.

Interestingly, industries with significant job gains also experienced declining pay growth. This suggests that the labor-supply challenges faced by employers during the Covid-19 pandemic have eased.

While the upcoming jobs report will provide further insights into wage growth, policymakers at the June FOMC meeting noted that the current slowdown in pay increases is still below the bank’s target of 2% inflation.

Stay tuned for Friday’s job report, which will be released at 8:30 a.m. Eastern.

Note: Contact information removed for a more concise presentation.

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