Breaking News: U.S. Jobs Report, June 2022
The U.S. employment engine showed no signs of a meaningful slowdown in June according to the latest report from the Bureau of Labor Statistics. U.S. employers added a better-than-expected 372,000 jobs during June and the unemployment rate remained unchanged at 3.6%. It is remarkable that a large share of the jobs added in June occurred in the higher-paying professional services categories, which includes most office workers. We also saw notable gains in the retail sector, which was hardest hit by the COVID-19 pandemic.
On the one hand, the latest job growth numbers confirm that the U.S. labor market is in excellent health. This is good news for property markets, especially apartments, because job growth is the number one driver of demand for rental units. Based on June’s employment numbers, we expect apartment rent growth in the U.S. to remain elevated for the foreseeable future.
On the other hand, the high rate of job growth in June suggests that the Federal Reserve has yet to achieve its goal of slightly slowing the labor market in order to tame inflation. In particular, the labor force participation rate was unchanged this month at 62.2%, which is significantly below its pre-pandemic level. Participation is one of the key indicators tracked by the Fed because it speaks to the imbalance between the supply and demand for labor.
“The presentation of U.S. employment data, with information that serves as a kind of economic thermometer, tends to generate a lot of volatility in world markets, especially on the day of disclosure, adding uncertainty and worrying investors, who end up pricing indices in short-term transactions,” says Carlos Vaz, CEO of CONTI Capital. “With today’s result, the U.S. employment engine does not show any more severe signs of slowing down and suggests that the Fed is not achieving its objective of slowing economic activity to the point of controlling inflation. So we can expect further interest rate hikes, but at a smooth pace. In my view, the U.S. central bank is seeking a balance between cooling the economy and fighting inflation, in an attempt to avoid a tougher macroeconomic scenario of recession. All the data we have available indicate that if the U.S. enters a recession caused by rising interest rates, the slowdown will be relatively mild.”
The big question moving forward is what the Fed will do with interest rates. June’s strong employment numbers give the Fed more reason to continue its aggressive rate hiking campaign. The Fed raised rates by 75 basis points at its last committee meeting, which was the sharpest one-time increase in decades. The job numbers this morning leads us to believe that the Fed will raise rates by at least another 50 basis points in July. Much will depend on the inflation report that will be released this upcoming Wednesday.
The course of the U.S. economy over the next year is highly dependent upon the Fed’s strategy to lower inflation at all costs. Critical to this goal is to rebalance the supply and demand of labor in the U.S., which is contributing to higher costs and sparking fears of a wage-price spiral where workers come to demand higher raises in order to compensate for rising prices. The June job report shows that wages increased by 5.1% compared to a year earlier, which does represent a bit of a decline from the past three months.
We were starting to see some rebalancing on Wednesday when the government released data on job openings. The latest report showed that job openings fell by 427,000, which is the largest decline in openings since the start of the COVID-19 recession and the second consecutive month of declines. While this is moving in the right direction, the numbers still show a very tight U.S. labor market which will continue to put upward pressure on wages in the short term.
The U.S. economy is in an interesting place right now where we are looking at the labor market reports to see that the economy is strong and that inflation is coming down. While these two goals could conflict, we are really trying to see if the Fed can effectively engineer a “soft landing” where economic growth slows in order to tame inflation, but it doesn’t slow too much so as to trigger a recession. This is the essential challenge facing the Fed today because the rate setting committee has a dual mandate to maintain full employment and price stability. Full employment has already been achieved, now it needs prices to come down meaningfully.
In our view, however, the Fed may be overconfident in its ability to bring inflation down through interest rate hikes. That is not to say that inflation will remain sky-high for the foreseeable future. In fact, we see inflation decelerating significantly in the months ahead as supply chains continue to normalize and energy and food prices begin to moderate. It will take several more months to come down, but all signs suggest that inflation will return to more normal and tolerable levels in 2023. However, the Federal Reserve has very little to do with the supply side of the economy, from which most of the current price pressures stem. What this means is that the Fed could be embarking on a policy error by which they raise interest rates in an economy that is already slowing and with little to no impact on the major causes of inflation.
Despite all of these potential risks, the U.S. economy remains structurally sound despite decelerating growth and unusually high inflation. June’s strong job growth number tells us that the real engine of economic growth—the U.S. consumer—is in a good position thanks to a healthy labor market and rising employment income. It also tells us that residential real estate in the U.S., apartments in particular, will remain in high demand.