Evening Brief – 08.04.23
The Bureau of Labor Statistics’ (BLS) nonfarm payrolls data for July showed the smallest gain in two and half years, printing at 187,000 and below expectations of 200,000, while the unemployment rate unexpectedly dropped to 3.5% from 3.6%.
Furthermore, the BLS downwardly revised the previous two months by 49,000, making it six months in a row of downward revisions. Looking at the headline number and adjustments, it is evident the labor market has softened.
In context, the 187,000 gain remains a historically robust figure for the purposes of the Federal Reserve’s monetary policy. Economists predict that the US needs less than 100,000 net new employment to account for population growth. During 2018 to 2019, payroll gains averaged 163,000.
The labor force participation rate was 62.6% for the fifth month in a row. The employment-to-population ratio remained stable at 60.4%.
But while the headline numbers were a mild disappointment, the Fed will likely place its attention on the unemployment rate, which means that the central bank’s forecasts for an increase to 4% by year-end will have to be altered.
Wage figures were more confusing, with average hourly wages coming in higher than the 4.2% predicted, at 4.4%, or unchanged from the previous month; monthly, the growth was 0.4%, higher than the 0.3% expected and matching the previous month’s increase.
However, perhaps one reason hourly wages increased was because hours worked decreased to 34.3 hours, matching the lowest level since the spring of 2020, during the height of the pandemic.
Bloomberg Economics’ Anna Wong and Stuart Paul also had some cautious observations: “July’s surprisingly low nonfarm payrolls, and the downward revision to June’s figure, reinforce our view that cracks are emerging in the labor market. Firms cut workers’ hours, something that has preceded larger-scale layoffs in past business cycles.”
The Fed is most likely concerned with the unemployment rate and average hourly earnings figures. However, in isolation, it may not be sufficient to elicit a more hawkish response from the FOMC.
The market is still pricing very low odds of a September hike (13%) and just 30% for the November meeting.
While interest rates fell slightly because of the weaker-than-expected jobs report, this could only be a brief halt. Treasury supply will be the main influence of the rates market, especially with new sales of 10- and 30-year paper coming up next week.