A Weaker Pace of Hiring; A Look Ahead to CPI

On Friday, nonfarm payrolls rose by 206k in June, surpassing the 190k gain expected according to Bloomberg, albeit the weakest gain in two months. The three-month average, meanwhile, fell from 212k to 177k as?a result of downward revisions to earlier data.

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May payrolls were revised down from a 272k gain to a lesser 218k increase. Coupled with additional downward revisions to previous months, the?overall change in nonfarm payrolls (June data + net revisions) was just 95k, the weakest monthly pace since December 2020.??

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In the details, private payrolls rose by 136k in June following a 193k gain in May. Goods-producing payrolls increased by 19k, due to a 27k gain in construction payrolls.? Manufacturing payrolls, however, fell 8k in June.

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Private service producing payrolls rose by 117k in June following a 181k gain in May. Education and health payrolls led the gain in June, rising 82k, in line with the 81k gain the month prior. Trade and transport payrolls climbed 14k, despite a 9k drop in retail trade payrolls, financial payrolls rose 9k, and leisure and hospitality payrolls increased 7k in June. Also, information payrolls gained 6k, the largest monthly gain since the start of the year. On the weaker side, professional and business services payrolls fell 17k, due to a 49k drop in temporary help payrolls, the fifth consecutive monthly drop. Finally, government payrolls rose by 70k in June following a 25k gain in May.

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Household employment rose by 116k in June, the most in three months. The labor force, meanwhile, increased by 277k following a 250k decline in May. Thus, the unemployment rate unexpectedly ticked up from 4.0% to 4.1% in June, the highest since November 2021. According to the median forecast, the unemployment rate was expected to remain at 4.0% for a second consecutive month.

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The labor force participation rate, meanwhile, ticked up from 62.5% to 62.6% in June, as expected and a two-month high.

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Also, average hourly earnings rose 0.3% in June, as expected and following a 0.4% increase in May. Year-over-year, wages rose 3.9%, down from a 4.1% gain in May and a two-month low.

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Finally, the average workweek remained at 34.3 hours in June for the third consecutive month.

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Bottom Line: The latest employment report was a welcome step in the right direction, indicating a further cool down in labor market conditions, with sizable downward revisions to earlier data. That being said, more broadly, while arguably a rebalancing is taking pace, the expected slowdown in demand and overall impact on the U.S. labor market remains still relatively muted. Again, momentum is slowing in many key categories of economic activity, particularly as younger and lower-income consumers more heavily adjust spending; but the readjustment, particularly amid still-solid wage growth at near 4%, remains less than anticipated, undermining at least some expectations for a near-term reduction in rates, or at least a necessity for less restrictive policy.

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The Fed has set the bar relatively high for rate reductions with a focus on further disinflation and a need for "many" more months of convincing data. With less than half the year left, and base effects from 2023 increasingly diluted in the second half, price pressures will expectedly remain elevated, or even risk pushing higher in coming months.?While this doesn’t eliminate the possibility of a rate cut this year as this is clearly a Fed desperate to provide relief, it does seem to undermine optimism for a nearer term cut, despite a weaker-than-expected June labor report.

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The reaction to Friday’s report was relatively muted as participants slowly returned from the 4th of July holiday. Longer-term yields closed down 8bps to 4.28%. As of 9:43 a.m. ET this morning, yields are up 2bps at 4.30%.?

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This week the economic calendar begins today with a look at consumer credit. Later today, consumer credit is expected to rise by $11.0b in May following a $6.4b gain the month prior.

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Tomorrow, the June NFIB Small Business Optimism Index is expected to decline from 90.5 to 89.0 in June.

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Later in the week, on Wednesday, weekly mortgage applications and wholesale inventories.

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On Thursday, weekly jobless claims, along with an updated look at inflation with the June CPI report followed by the June PPI report on Friday.

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Following hotter-than-expected readings in Q1, the CPI cooled somewhat in April and further in May. This month, the CPI is expected to rise 0.1% in June and 3.1% over the past 12 months, potentially declining from the 3.3% annual gain in May. Meanwhile, the PPI is expected to rise 0.1% in June and 2.3% year-over-year, potentially rising from the 2.2% annual rise in May.

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Excluding food and energy costs, the core CPI is expected to increase 0.2% and 3.4% year-over-year, potentially unchanged from the annual gain in May, while the core PPI is expected to rise 0.2% in June and 2.5% on an annual basis, again, potentially rising from the 2.3% pace reported in May.

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Also on Friday, the preliminary University of Michigan Consumer Sentiment Index is expected to decline from 68.2 to 67.0 in July.

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Finally, on the Fed-speak front, we will hear from more Fed officials this week – including Chair Powell again – along with Chicago Fed President Austan Goolsbee, Atlanta Fed President Raphael Bostic, and St. Louis’s Alberto Musalem.

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-Lindsey Piegza, Ph.D., Chief Economist