July payrolls assuage any fear that the U.S. economy is in recession
- The U.S. economy added 528k jobs in July, coming in well above the consensus forecast of 250k. Revisions to the prior two months were also positive, adding 28k jobs from previously reported May/June figures. U.S. payrolls have now surpassed their pre-pandemic level.
- Employment gains were again widespread, with education & health care (+122k), leisure & hospitality (+96k) and professional & business services (+89k) leading the charge. Outside of these industries, hiring remained robust in transportation & warehousing (+21k), information (+13k) as well as wholesale (+11k) and retail (+22k) trade. Goods producing industries (+69k) also recorded hefty gains, with construction (+32k), manufacturing (+30k), and mining & logging (+7k) all adding jobs in July. Hiring in across the public sector (+57k) was also higher, after having recorded a modest decline the month prior.
- The unemployment rate declined by a tenth of a percentage point to at 3.5% – returning to its pre-pandemic level. Based on the household survey, employment was up 179k, while the labor force fell by 63K. As a result, the participation rate fell by a 0.1pp to 62.1%
- Average hourly earnings rose by 0.5% month-on-month to $32.27. On a year-over-year basis, wage growth held steady at 5.2%.
Key Implications
- Woah! This morning's reporting should almost certainly assuage any fears that the U.S. economy is in a recession. While payrolls had been showing some signs of slowing in recent months, July data shows a complete reversal in that trend and flies in the face of other labor market metrics (initial jobless claims and job openings), which have suggested that the labor market was cooling.
- While we don’t want to sound like a broken record, it's important to emphasize that these gains are not sustainable! The participation rate has moved sideways this year (and even ticked lower in July), implying the lack of labor supply will soon be a binding constraint on hiring.
- With the FOMC dropping its forward guidance and moving to a data dependent "meeting-by-meeting assessment", today's report will do nothing to dissuade policymakers from further tightening monetary policy in the months ahead. Indeed, we heard from several Fed speakers over the past week, and all struck a decisively hawkish tone – likely in response to markets misreading Powell's press conference last week as coming across more dovish. In response to the Fed speak and this morning's job numbers, market pricing for more rate hikes by year-end have come up. Moreover, futures markets have sharply sold-off following after the jobs report and we’re seeing a deeper inversion in 10Y2Y spread, now having widened to 40bps.
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