Breaking News: U.S. labor market makes greater gains than expected

August 5, 2022

U.S. employers added a whopping 528,000 jobs in July, according to the Bureau of Labor Statistics, far exceeding even the most bullish forecasts. Meanwhile, the unemployment fell from 3.6% in June to 3.5% in July. Despite two consecutive quarters of negative GDP growth, the U.S. is far from a recession as indicated by the incredible strength of the labor market. However, the slowdown in business and residential investment during the second quarter of 2022 is likely to weigh on labor market gains for the remainder of the year.

Even more impressive is the breadth of job gains in July. All major sectors reported positive changes over the past month. Of particular interest to Class A multifamily investors, professional and business services employment advanced by another 89,000 jobs during July. There are now nearly one million more people working in this critical sector than just prior to the start of the pandemic.

On the other hand, there was little movement in the labor force participation rate, which is important in gauging the extent to which the labor market is rebalancing following the mass layoffs that occurred in Spring 2020. In addition, average hourly earnings increased by 5.2% from a year earlier, which is a slight acceleration from the month prior and gives some support to those arguing that rising consumer prices are feeding back into wages.

The rapid pace of interest rate hikes has raised concerns that the U.S. is due for a hard economic landing and recession. However, despite two consecutive quarters of negative economic growth, we still hold the view that a soft landing remains in the realm of possibility.

Key to this conviction is the strength of the U.S. labor market, which remains exceptionally tight. However, the imbalance in labor supply/demand is helping to keep inflation elevated by causing businesses to raise prices while workers are commanding higher wages.

Ideally, we’ll see some loosening in the labor market as well as an increase in labor force participation, which would help bring down inflation without pushing the economy into recession. This would constitute a soft landing.

Earlier in the week, we had our first indication that the labor market was starting to cool, even if only slightly. The BLS reported that job openings in June had fallen by 605,000, which would be the steepest decline since 2020. However, the rate at which workers were voluntarily leaving their jobs and the ratio of job openings to unemployed workers remained high. This is a key indicator that the Federal Reserve is monitoring to determine how the labor market is responding to rising interest rates and slowing economic growth.

All in all, the U.S. labor market was in incredible shape during the first month of the third quarter, putting to rest concerns that the U.S. is currently in a recession. Demand for labor remains sky-high as employers are eager to fill open positions. With real-time data sources suggesting that inflation is beginning to slow, the U.S. economy may just be able to avoid an economic hard landing.