Daily Management Review

US Job Market Slowing Down As The Unemployment Rate Hikes To 4.1%


US Job Market Slowing Down As The Unemployment Rate Hikes To 4.1%
Although hiring in the government and healthcare sectors accounted for nearly three-quarters of the payroll gain in June, U.S. employment increased solidly. Meanwhile, the unemployment rate reached a two-and-a-half-year high of 4.1%, indicating a weakening labour market that keeps the Federal Reserve on track to begin reducing interest rates soon.
In addition, the economy produced 111,000 fewer jobs in April and May than first predicted, according to the Labour Department's widely followed employment report on Friday. This suggests that the trend in payroll growth was moderating.
A growing labour pool and annual pay growth at the weakest rate in three years contributed to the employment market's warning signs.
Approximately 277,000 individuals entered the workforce, which explains why the unemployment rate rose from 4.0% in May to its highest point since November 2021.
After the disinflationary trend was upset in the first quarter, the data may increase Fed officials' confidence in the inflation forecast when combined with the May price moderation. The U.S. central bank, which significantly tightened monetary policy in 2022 and 2023, is predicted by the financial markets to begin its easing cycle in September.
"We now have definitive evidence of labor market cooling with a somewhat alarming rise in the unemployment rate in recent months that should give policymakers 'more confidence' that consumer inflation will soon return to the 2.0% target on a sustainable basis," said Scott Anderson, chief U.S. economist at BMO Capital Markets.
The Labour Department's Bureau of Labour Statistics said that government employment contributed to a 206,000 rise in nonfarm payrolls last month. Payrolls increased by 190,000 last month, as predicted by economists surveyed by Reuters, although the unemployment rate remained at 4.0%.
The first half of this year has seen an average monthly increase in jobs of almost 222,000. Considering a recent spike in immigration, analysts calculate that the economy needs to produce between 180,000 and 200,000 jobs each month to keep up with growth in the working-age population.
Compared to payroll statistics, the Quarterly Census of Employment and Wages (QCEW), a trailing indicator of employment, has indicated a substantially slower rate of job growth until the fourth quarter of 2023.
Employers' reporting to state unemployment insurance (UI) programmes provide the QCEW statistics. The BLS releases its payroll benchmark estimate for the 12 months ending in March of this year in August, and economists anticipate that employment will be revised downward. However, they contend that the QCEW data excludes undocumented immigrants, a group they believe played a significant role in last year's robust job growth.
Even though acyclical businesses like state and local governments and healthcare remained to be the main drivers of hiring in June, the percentage of industries reporting job gain increased to 59.6% from 56.4% in May.
With the exception of state and education, local government contributed to the 70,000 job increase in government employment, which is the largest increase since December.
Private payrolls grew by 136,000, with 82,400 new jobs added in the healthcare and social support sectors.
Payrolls in construction increased by 27,000. But both the industrial and retail industries saw employment losses. Employment in professional and business services fell by 17,000, with the largest loss in temporary help employment since April 2020 occurring in the category of 49,000 positions. That probably means that future payroll improvements will be slower.
According to Jeffrey Roach, chief economist at LPL Financial, "we don't see apocalyptic signs within the labour market so far, but investors should be wary when the labour market is supported by government payrolls." "The downward revisions to the previous two months is consistent with an economic slowdown."
Wall Street stocks were primarily trading higher. In comparison to a currency basket, the dollar declined. Treasury bond prices increased.
Demand is being negatively impacted by the Fed's 525 basis point rate rises since 2022 as well as the depletion of surplus reserves from the COVID-19 epidemic.
Traders of federal funds futures saw a roughly 77% probability of a rate cut at the Fed's Sept. 17-18 meeting, according to CME Group's FedWatch tool. Additionally, traders are factoring in a growing likelihood of a second rate decrease in December.
The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range since last July.
According to the central bank's June 11–12 meeting minutes, which were released on Wednesday, officials realised that the economy seemed to be slowing down and that "price pressures were diminishing."
After increasing by 0.4% in May, average hourly wages increased by 0.3% in June. Through June of this year, earnings rose by 3.9%. This was the lowest pay increase since June 2021, and it came after a 4.1% increase in May. A wage growth range of 3% to 3.5% is thought to be compatible with the Fed's 2% inflation objective.
The employment data was consistent with ongoing economic expansion, albeit with its milder details. Still, a rise in unemployment may be indicated by the unemployment rate's second consecutive monthly increase.
The unemployment rate is taken on a household survey that shows a 116,000 increase in employment in June, but not enough to keep up with supply. From a low of 3.5% in July of last year, the unemployment rate has grown by six tenths of a percentage point.
Comparing the household survey to nonfarm payrolls, there hasn't been any employment growth.
Preston Caldwell, chief U.S. economist at Morningstar, stated, "We have very good reason to think that the household survey is underestimating immigration, contributing to the underperformance versus payrolls."
In June, there were 166,000 more persons enduring extended periods of unemployment, totaling 1.516 million. However, fewer individuals reported working part-time due to financial constraints.
The percentage of Americans of working age who are either employed or seeking employment increased to 62.6% in May from 62.5% in May.
Prime-age workers, meaning those between the ages of 25 and 54, saw a rise in participation to 83.7%. That was an increase from 83.6% in May to a level not seen since February 2002.
"The labour market is moving along for the time being, but there's growing evidence that it could stall if it slows down further," stated Indeed Hiring Lab's head of economic research for North America, Nick Bunker.