U.S. July employment report: A recession is not yet at hand

REAL ECONOMY BLOG | August 05, 2022

Authored by RSM US LLP

Economies in recession do not produce 528,000 jobs in a given month and have 3.5% unemployment rates. Since January, total employment has increased by 3.3 million jobs and the unemployment rate has declined from 4% to 3.5%.

With such a robust labor market, claims that the economy is in recession fall flat and should be politely set aside.

With such strong job gains, claims that the economy is in recession should be politely set aside.

While the underlying detail in the report suggests that the top-line number overstates the trend in hiring and will most likely be revised down in the coming months, labor demand remains rock solid.

In addition, long-term demographic changes and labor market dynamics will not require large monthly gains to stabilize the unemployment rate once it moves back to our estimate of full employment near 4.5%. In fact, we estimate that it will take an average gain of only about 60,000 jobs per month to maintain full employment.

Even as the economy slows, the unemployment rate may not soar to levels consistent with past recessions. That implies a higher policy rate and an imminent move into restrictive terrain by the central bank.

That means that the Federal Reserve will have to continue pushing the policy above the current 2.25% to 2.5% range.

The tight labor market implied by the July report and the 5.2% increase in average hourly earnings strongly suggest that the Fed needs to hike its policy rate by 50 basis points at the September meeting and will in all probability need to take that rate to at least 4% or higher in the near term.

Monthly payroll change

The data

Employment gains were robust across all sectors, with service-providing companies leading the way with a 402,000-job gain. Goods-producing firms added 69,000 jobs, construction firms increased hiring by 32,000 and manufacturing firms added 30,000.

The trade and transport sector added 54,000 jobs, the information and the financial sector added 13,000 each, while business services added 89,000. Retail trade businesses added 22,000 positions and firms added 10,000 temporary workers on the month.

The education and health sector added 122,000 jobs in July while government sector employment grew by 57,000.

Average hourly earnings remain hot with a 0.5% month-over-month gain, which translates to a 5.2% increase over a year ago. The wage pipeline is in line with that data as the three-month average annualized pace increased by 5% on a year-ago basis.

Total private hours worked was unchanged on the month at 34.6 hours, while aggregate hours worked, which provides a solid forward look at spending, increased by 3% on a three-month annualized pace.

The labor force participation rate inched down to 62.1% from 62.2% previously. The median duration of unemployment was also unchanged at 8.5 weeks.

The takeaway

Labor demand remains rock solid, and the idea of contraction in the labor market this year should be dismissed. The top-line gains in employment and wages will result in further aggressive rate hikes by the Federal Reserve as it attempts to restore price stability to the economy.

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This article was written by Joseph Brusuelas and originally appeared on 2022-08-05.
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