This Week's State Of The Economy - What Is Ahead? - 07 June 2024

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Jun 11, 2024

This Week's State Of The Economy - What Is Ahead? - 07 June 2024

The U.S. labor market continues to defy expectations. Employers added 272K net new jobs in May, which was stronger than even the most bullish forecaster among 77 submissions to the Bloomberg survey. Yet, when you get past that upside surprise in hiring, the data appear less strong.

Job growth continues to be relatively concentrated. Hiring in the healthcare & social assistance (+83.5K), leisure & hospitality (+42.0K) and government (+43.0K) industries accounted for over 60% of job growth last month and hiring has been concentrated in these less-cyclically-sensitive industries over the past year. Temporary help employment, which has historically led overall hiring, has continued to see outright layoffs. The unemployment rate rose for the second-straight month to 4.0% as the household survey of employment reveals a strikingly weaker picture—jobs fell by 408K, according to this measure. Labor force participation also softened and the average work week held steady.

Elsewhere, we learned labor demand continues to soften. Total job openings in the economy slipped to the lowest level since February 2021 in April, and there are now just 1.2 job openings per unemployed worker, which is in line with the pre-pandemic ratio. The headline gain in payrolls cannot be ignored. It's fairly consistent with the recent monthly run rate (chart), but we do believe it should be taken in the broader context of a labor market that is showing clear signs of moderation.

The market reaction to the jobs report was swift, with market pricing now implying just one rate cut by year-end. Beyond the strong job gain, average hourly earnings rebounded 0.4% in May, pushing the annual rate back up to 4.1%. While this isn't exactly a favorable development in the fight against inflation, earnings can be noisy on a monthly basis. Policymakers will need to see a few slower inflation reports in order to start cutting rates by the fall; next week's CPI report is in focus.

We learned this week that purchasing managers are seeing less robust price growth. The prices paid measure of both the ISM manufacturing and services indices eased in May, but they still remain consistent with an expansion in prices. More simply, most industries are still seeing higher prices, though the pace of growth is slowing. The more recent drift higher for manufacturing prices (chart) also suggests we won't see as much relief from goods inflation this year, ultimately keeping the onus on the service sector in terms of making further progress toward the Fed's 2% inflation goal.

The purchasing manager data more broadly continued to show varied outcomes for the manufacturing and services sectors. The ISM manufacturing index slid for the second-straight month and remains consistent with contraction in the sector. A sharp drop in new orders was responsible for most of the pullback, indicating weaker demand conditions. In terms of services, the ISM leaped by the most in 16 months in May, but that gain largely reverses an unusually weak print for April, and suggests overall services sector activity remains steady. The economy continues to chug along.



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