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US Jobs Report to Show ‘Natural Slowdown’ But Not Broad Weakness

Economy Jul 07, 2022 17:32
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(Bloomberg) -- US employers are forecast to have added the fewest jobs in over a year in June, but economists say that slowdown isn’t concerning. At least not yet.

The jobs report from the Labor Department on Friday is expected to show the unemployment rate remaining at a historically low level and another month of solid wage growth, suggesting that employers are still eager to find qualified workers and retain the ones they already have. Job openings are hovering near record highs, while layoffs are well below pre-pandemic levels.

The labor market remains a bright spot in an otherwise darkening picture for the economy as the Federal Reserve ramps up its fight against decades-high inflation, raising the prospect of an impending recession. While layoffs from high-profile companies like Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) have made headlines in recent weeks, there’s little evidence that job cuts are becoming widespread across industries.

As the US gets closer to pre-pandemic levels of employment, it will be impossible for the economy to consistently add half a million jobs per month as it did at the height of the recovery. “It’s just not sustainable based on demographic trends,” said Ryan Wang, US economist at HSBC Holdings Plc.

Forecasters expect the US added nearly 270,000 jobs in June, which would be one of the smallest gains of the pandemic recovery. Even so, that’s well above the average seen in the years leading up to the onset of Covid-19, and likely reflects “more of a natural slowdown than a slack in the economy,” said Brett Ryan, senior US economist at Deutsche Bank AG.

Dismissals so far have been concentrated in sectors like technology and housing that fared well during the pandemic, said Nick Bunker, economist at Indeed Inc. The real estate market is also particularly sensitive to borrowing costs, and higher mortgage rates have led to a softening in home sales and the least refinancing activity in more than 20 years. 

“You can imagine that they ramped up really hard because things were going really well for them and now they’re pulling things back,” Bunker said. “That’s not the case you’re seeing for the rest of the economy.”

While residential construction may also show signs of weakness, hiring in service industries like travel, entertainment and restaurants is expected to continue to climb, given that demand in those sectors remains high.

What Bloomberg Economics Says...

“Even if ‘soft landing’ ultimately proves as taboo a term as ‘transitory inflation,’ there are reasons to think the job market will not fall off a cliff this year. Openings are high and decelerating economic growth reflects uneven patterns beneath the surface. Service-sector recovery is still underway, favoring sectors like leisure and hospitality, along with education and health services.”

-- Anna Wong, Yelena Shulyatyeva, Andrew Husby and Eliza Winger, economists

For the full note, click here.

In some ways, the Fed would want to see hiring slow down broadly as it tries to curb demand in all parts of the economy, including for labor. That would help take pressure off of wage growth, a key source of inflation.

Another way to achieve that would be through a higher labor force participation rate, which measures the number of people either actively working or looking for a job. Economists expect that to have risen in June to match the highest level of the recovery, and an uptick would help employers fill millions of open positions.

“That’s really the Goldilocks scenario for the Fed, where you get more people coming into the labor force, more people collecting a paycheck, but some of that inflationary pressure on businesses is reduced,” said Sarah House, senior economist at Wells Fargo & Co.

But too much of a dropoff in payrolls growth -- less than 100,000 -- would be a concern,” said Michael Feroli, chief US economist at JPMorgan Chase & Co. Feroli, who is forecasting a 275,000 rise in June payrolls, said that type of deceleration would be more concerning than the anticipated cooling in the labor market and harder to dismiss as just noise.

In such a situation where that so-called “soft landing” scenario isn’t achieved, and employers scale back hiring plans as recession alarms sound, the current strength of the job market could take a quick turn for the worse. 

“It stands to reason that employment growth will slow,” HSBC’s Wang said. “And therefore it’s extremely important to know how quickly it’s slowing, because employment trends can change quickly and hiring trends can change quickly.”

©2022 Bloomberg L.P.


US Jobs Report to Show ‘Natural Slowdown’ But Not Broad Weakness

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