REAL ECONOMY BLOG | July 05, 2024

This is what an economy normalizing back toward long-term trends in growth, inflation and hiring looks like.

In June, the American economy generated 206,000 jobs while the unemployment rate increased to 4.1%, or 4.054% when taken out to three decimal points. At the same time, wage growth eased to 0.3% on the month and 3.9% on the year.

On a three-month average annualized pace, average hourly earnings growth has decelerated to 3.5% from 4.2% at the beginning of the year.

The acyclical sectors of health care and government accounted for 74% of all the jobs created on the month. We expect the top-line gains to slow back toward what we think is the new breakeven rate of monthly job creation—near 150,000—because of the increase in the labor supply through the immigration channel, although that too is slowing.

Because of the downward revision in the May jobs report to 111,000, the three-month moving average of job growth cooled to 177,000 from 249,000.

That decline should send a signal to the Federal Reserve that with inflation sitting at 2.6% (or, to be more precise, 2.563%), conditions are aligning for a rate cut in September.

It is critical that the Fed not talk itself into a corner and fall behind the curve on rates as it did during the first year of the pandemic.

As the economy cools, the Fed needs to relax its too-restrictive policy rate to avoid an unnecessary end of the business cycle. Given that disinflation is moving through the economy amid easing growth and a cooling labor market, a policy rate between 5.25% and 5.5% is no longer appropriate.

During the first half of the year, the American economy generated 1.078 million jobs with an average gain of 222,000 per month. The unemployment rate has averaged 3.9%.

The data

Total private employment increased by 136,000 positions, with goods-producing jobs increasing by 19,000 and construction by 27,000. Manufacturing fell by 8,000 jobs.

Private service-providing jobs increased by 117,000, with private education and health care adding 82,000 positions while the government sector added 70,000.

Trade and transport added 14,000 positions, information 6,000 and the financial sector 9,000. The leisure and hospitality sector added 7,000 on the month. That will increase strongly in the July jobs report.

Professional business services declined by 17,000 jobs while temporary hiring dropped by 49,000.

The household survey pointed toward an increase of 116,000 in total employment and a labor participation rate of 62.6%, which increased from 62.5% previously.

The employment-to-population ratio was steady at 60.1%, while the median duration of unemployment moved up to 9.8 months from 8.9 months previously.

The takeaway

Demand for labor remains solid albeit at a cooling pace. Fears of a wage spiral that would result in a resurgence of inflation can be put to rest as the three-month average annualized pace of average hourly earnings has eased to 3.5%.

The primary takeaway from the June employment data is that it is consistent with economic normalization and is in alignment with other growth and inflation data that point toward what should be an easing of a too-restrictive policy rate by the Federal Reserve in September.