The Federal Reserve’s pursuit of lower inflation rates relies heavily on achieving greater alignment between labor supply and demand in the United States. However, recent data suggests that the message is not effectively reaching the job market.
The latest figures from ADP, a payroll company, indicate that the labor market is still operating at a significantly higher level than desired by the Federal Reserve. In June, private-sector employers added a staggering 497,000 jobs, nearly double the forecasted 250,000 by economists surveyed by FactSet.
While economists currently predict that the forthcoming Bureau of Labor Statistics (BLS) report will reveal an addition of 215,000 jobs by nonfarm private employers in June, ADP’s report casts doubt on these conservative estimates. Although ADP’s data occasionally deviates from the government’s figures, their Thursday report has challenged economists’ expectations.
“June has historically been a robust month for hiring,” stated Nela Richardson, ADP’s chief economist on Thursday. She emphasized that the previous month was no exception to this trend.
Furthermore, the BLS’s recent Job Openings and Labor Turnover Survey report, released on the same day, does not present a significantly cooling labor market. While job openings in May exceeded pre-pandemic levels by 40%, totaling 9.8 million (slightly lower than the forecasted 9.9 million), hiring rates remained relatively steady at 6.1 million new hires. Additionally, the number of individuals voluntarily leaving their jobs, considered a more reliable indicator of labor market strength by Julia Pollak, Chief Economist at ZipRecruiter, increased by 250,000 to reach four million in May.
The persistent strength of the labor market poses a challenge for the Federal Reserve’s efforts to combat inflation effectively. As the job market continues to outperform expectations and job openings remain high, it remains to be seen how the Federal Reserve will navigate this complex landscape.
The Labor Market: A Gradually Slowing, Yet Still-Robust Landscape
According to recent data, in the month of May, approximately 5.9 million workers made the decision to part ways with their employers. This number remained relatively unchanged and showcased a stable trend. It is worth noting that among these figures, about 1.6 million individuals were subjected to layoffs, indicating a slight decline from the previous month. Moreover, experts suggest that this downward trend is likely to continue in the coming months.
Recent reports from outplacement firm Challenger, Gray & Christmas highlight that there were 80,089 layoff announcements in May. However, this figure dropped significantly to 40,709 in June.
These statistics paint an overall picture of a labor market that is gradually slowing down, yet still maintaining its robust nature. Nick Bunker, the Research Director at Indeed Hiring Lab, describes it as a labor market that is now cooler compared to the same period a year ago, but still remains quite hot.
Unfortunately, these numbers do not bode well for Federal Reserve officials, who are actively seeking to cool down the labor market in order to address the issue of inflation. If the American workforce continues to enjoy ample job opportunities and employers persist in enticing workers with higher wages, it becomes unlikely that the inflation rate will be successfully moderated. Consequently, the Federal Reserve would then feel compelled to pursue a strategy of aggressive interest rate increases.
The stock market immediately responded to this data with a decrease in prices, while bond yields surged. As a result, the S&P 500 experienced a 0.8% drop on Thursday afternoon, while the Dow Jones Industrial Average fell by 1.1% and the Nasdaq Composite lost 0.9%.
However, it is crucial to remember that the labor market is more complex than these headlines might suggest. There are several nuances that indicate the impact of the Federal Reserve’s rate hikes. For instance, job declines within interest-rate-sensitive industries were observed in the month of June according to ADP. Additionally, there continues to be a decrease in hiring among large employers.
In a somewhat positive turn, initial claims for unemployment benefits came in higher than expected at 248,000 in the week ending July 1. Despite a gradual increase throughout the first half of the year, the unemployment rate remains historically low.
Uneven Job Growth Across Industries
According to a recent report by ADP, the pace of hiring is not consistent across industries. While lower-paying sectors like leisure and hospitality are adding jobs, industries that historically offer higher wages, such as information and finance, are scaling back their hiring efforts.
Federal Reserve Staff Analyzing Payroll Employment Reports
In addition to the ADP findings, staff members at the Federal Reserve are delving deeper into the employment numbers. They suggest that the reported job growth may actually be weaker than indicated by the payroll employment reports. The minutes from the June Federal Open Market Committee meeting highlighted this analysis. Furthermore, Federal Reserve officials continue to predict that employment growth will likely slow down further, aligning with their projections of below-trend economic growth.
Slowing Wage Growth
There is some positive news regarding wage growth for the Federal Reserve. ADP’s report shows a significant slowdown in pay increases. Americans who changed jobs experienced a 11.2% increase in June, the slowest pace of growth since October 2021. Similarly, those who remained in their positions saw a year-over-year pay increase of 6.4%, a decline from the 6.6% recorded in May.
Impact on Industries
Interestingly, industries that experienced substantial job gains also saw a decline in pay growth. This suggests that labor-supply issues faced by employers during the Covid-19 pandemic have eased.
Upcoming Jobs Report and Inflation Concerns
The jobs report for Friday will provide more insight into wage growth. However, during the June FOMC meeting, policy makers expressed that the slowdown in pay increases was still not significant enough to align with the bank’s goal of 2% inflation.
The jobs report is scheduled to be released at 8:30 a.m. Eastern time.