The US job market cooled back down in June, adding just 209,000 jobs, and fueling optimism that the economy is on course to nail that elusive soft landing of lowering inflation without triggering a recession. The June job gains, released Friday by the Bureau of Labor Statistics, were nearly 100,000 positions below May’s stronger-than-expected showing of 306,000 and also fell below economists’ expectations for a net gain of 225,000 jobs. Still, the unemployment rate ticked down to 3.6% from 3.7% the month before. US employers have now added jobs for 30 consecutive months.
While the Federal Reserve has tried to cool the economy with 10 consecutive rate hikes, the labor market has remained impervious to those efforts adding jobs every month. Through the first half of 2023, the economy has added 1.67 million jobs. Fed officials have been hoping their aggressive rate-hiking campaign would bring about a slowdown in the job market, and especially in wage gains, which are viewed as a contributor to inflation. Friday’s report showed that average hourly earnings growth was unchanged at 0.4% from the month before and also unchanged at 4.4% year-over-year.
Wall Street appears to dismissing the economic data and is instead rallying looking ahead to a brighter 2024. Could it be wrong on rates and its inevitable impact on the economy?
Future Wealth’s View
Okun’s law (named after Yale economist – Arthur Okun) predicts that a 1% drop in employment tends to be accompanied by a drop in GDP of around 2%. Likewise, a 1% increase in employment is associated with a 2% GDP increase. The logic is fairly straightforward. The amount of output that an economy produces depends on the amount of labor (or the number of people employed) in the production process; when there is more labor involved in the production process, there is more output (and vice versa).
If June’s job report is the first sign of cooling in the job market, one would not know it by looking at the data of auto sales and airline prices. In fact, strong auto sales provides further evidence that the economy is humming along just fine. Earlier this week, GM reported double digit growth in 1H US sales; Tesla and Rivian reported stronger than expected global deliveries; Ford posted 10% growth in 2Q US sales. The brisk demand defies the narrative of a slowing economy with buyers paying near record prices for new wheels. Airline prices are on a similar trajectory with planes running at full capacity and transcontinental flight prices exceeding $500 once again.
Amidst this backdrop, we believe that the Fed will likely raise interest rates once again at the end July (pending a CPI report on July 12th). But, Wall Street may not care given the robustness of the economy and the strong consumer sentiment and spending. That said, we believe that equities may be ripe for a pullback following big gains in June and in the second quarter, which could lead to choppiness and consolidation heading into earnings season.