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The “too hot” labor market has become a little more “just right”

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In recent weeks, we have seen evidence accumulating that suggests that the economic narrative is shifting towards one where growth is cooling from very hot levels – but not so much that the economy is entering a recession.

The US job report in May, which was published on Friday, provided more confirmation of this shift.

According to the report, US employers added 390,000 healthy jobs in May. This was a decrease from the 436,000 jobs added in May, but still stronger than the 318,000 increase that economists expected.1

Unemployment was unchanged at a very low 3.6%, 2 although it is worth noting that labor force participation increased to 62.3% when 330,000 people entered the labor force.3

Average hourly earnings in May, meanwhile, increased by 0.3% from April, reflecting a 5.2% gain from a year ago. However, this is somewhat down from the annual growth of 5.5% in April and 5.6% in May.

In summary, the United States continues to put people back to work, that is good news for economic growth. The pace of job growth may be cooling, but employers seem to be attracting people back to the workforce without accelerating wage growth, which is good news for those who want to bring down inflation.


This is exactly the kind of balance the Federal Reserve hopes for as it continues to tighten monetary policy in its efforts to cool inflation from very high levels.

Here are some of what Wall Street’s top economists said after Friday’s report:

“It seems that we have passed the peak in wage growth.” – Stephen Juneau, American economist at Bank of America “Simply put, there is a good chance that wage growth has passed its cyclical peak and a cooling trend is underway.” – Bob Schwartz, senior economist at Oxford Economics “Today’s report lands in a sweet spot for the Fed.” – Sarah House, senior economist at Wells Fargo “For the Fed, today’s report is probably about the best they could have hoped for in the early stages of the austerity cycle.” Michael Feroli, chief economist at JPMorgan in the United States significant progress towards its inflation target. ” – Michael Pearce, senior US economist at Capital Economics “In short, the May report supports the view that while the labor market remains stable, it continues to slow gradually.” – Oscar Munoz, macro strategist at TD Securities “We do expect to see lower wage growth in the coming month, but this should not come as a big surprise given that 21.2 million of the 22 million jobs lost in March and April 2020 are now obsessed. ” – James Knightley, International Chief Economist at ING “This is a watershed for the wage path and now directly focuses on how deep this turn will be.” – Rick Rieder, CIO for Global Interest Rates at BlackRock

It may seem strange to celebrate a decline in wage growth. But high wage growth in the midst of tight supply is one of the reasons why we have high inflation. And wage growth is not worth much if inflation erodes your purchasing power. This is why good news is bad news these days.

Several signs that the labor market is declining

For almost two years, we have heard of a growing shortage of labor across industries as millions of jobs – and more – have become vacant, a challenge that has led to rising wages, which in turn has pushed inflation higher for goods and services.

But in recent weeks, we have seen signs that the labor market may be at a turning point.

Here are some of the data points:

None of this screams downturns, especially with layoffs at record lows. But overall, it seems that the labor market is a little less hot than it was earlier this year, and people are taking it up.

And the fact that this cooling has so far come without a significant increase in unemployment will be welcome news for the Fed as it maneuvers to bring down inflation.

That said, inflation data will be followed extremely closely in the coming months. For remember: The Fed’s ultimate goal is not to just slow down the economy. The ultimate goal is to cool inflation. Using political tools to slow down the economy is only a means to an end.

Related from TKer:

Back overview 🪞

📉 Shares fall: The S&P 500 fell 1.2% last week. The index is now down 14.3% from January 3 closed the highest at 4796.56, but 5.3% above its May 19 closed the lowest at 3,900.79. For more on market volatility, read this and this. If you want to read up on bear markets, read on this.

🌀 Bankers talk “hurricanes”: America’s top bankers used some colorful metaphors this week to describe the risk situation in the economy. Here’s JPMorgan Chase CEO Jamie Dimon (via The transcript): «Right now it’s a little sunny. Things are going well. Everyone thinks the Fed can handle this. That hurricane is right out there on the road. We just do not know if it’s a minor one or Superstorm Sandy … You should prepare. “

And here is Bank of America CEO Brian Moynihan (via The transcript): «We are in North Carolina. You have hurricanes that come every year. So we are always prepared if we do not have a choice. “

🤔 I like Moynihan’s characterization a little better, because the truth is that there are always financial risks left, and things can certainly go wrong in the near future. And they often do! Therefore, it is always good to be prepared. But it’s also good to be prepared and know that things almost always work out for the better in the long run.

💾 Microsoft’s softer look: In a regulatory filing Thursday, Microsoft lowered its revenue and earnings guidance for the current quarter “due to unfavorable exchange rate movements in the quarter through May.”

🚨 It is possible we will see more warnings like Microsoft’s in the coming weeks because S&P 500 companies generate about 40% of their revenue outside the US, according to FactSet. And the US dollar has strengthened significantly this year, which means that the value of sales generated abroad has been declining.

. That said, analysts continue to expect healthy earnings growth for 2022 and 2023.

🛠 Production picks up: According to the Institute of Supply Management (ISM), production activity accelerated in May: “Production performed well for the 24th month in a row, with demand recording faster monthly growth and consumption softening due to labor force constraints,” Timothy Fiore, Head of ISM Manufacturing Business Survey Committee, on Wednesday. “Overseas partners’ disruptions are beginning to affect US production, creating a short-term headwind for factory production growth. Ten percent of the panelists’ general comments expressed problems in obtaining material from their Asian partners, which will affect reliable deliveries during the summer months. ” For more on production, read this.

😭 Consumer confidence is down: The Conference Board’s consumer confidence index fell to 106.4 in May from 108.6 in April: «Purchasing intentions for cars, homes, white goods and more were cooled – probably a reflection of rising interest rates and consumers fluctuating from large tickets to expenses. on services, “said Lynn Franco of the conference board. – Holiday plans have also become softer due to rising prices. In fact, inflation is still important for consumers, with their inflation expectations in May virtually unchanged from April’s high levels. Looking ahead, you can expect that rising prices and further interest rate increases will pose a continued downside risk to consumer consumption this year. “

Remember that weak consumer confidence does not necessarily mean that consumption falls. For more on this, read this and this.

🏘 House prices are up: US house prices in March rose 20.6% from a year ago, according to the S&P CoreLogic Case-Shiller Index. This is the third highest reading in the index’s history. From S&P DJI’s Craig Lazzara: “Those of us who have anticipated a slowdown in growth in US house prices will have to wait at least a month longer … Mortgages are becoming more expensive as the Federal Reserve begins to raise interest rates, suggesting the macroeconomic environment may not support extraordinary house price growth much longer. Although it is safe to predict that price gains will begin to decline, the timing of the slowdown is a more difficult conversation. “

Up the road 🛣

These days, no economic calculation is more important than inflation. Friday comes with the consumer price index (CPI) from May. Economists estimate that the CPI rose by 0.7% from April, reflecting an increase of 8.2% from a year ago. Excluding food and energy prices, the core CPI is estimated to have increased by 0.4% month-over-month or 5.9% from year to year. Will the report confirm that peak inflation is behind us?


2.34 million jobs have been created so far in 2022. It is one of the more convincing statistics that the US economy has not driven towards a recession.

Unemployment is currently at its lowest level since the start of the pandemic. Before the pandemic, unemployment was as low as 3.5% in January and February 2020.

The civilian workforce consists of adults with a job or an active job seeker. Labor force participation represents the civilian labor force as a percentage of the adult population. One of the reasons why there are still 11 million vacancies is because labor force participation has not yet returned to pre-pandemic levels. You can read more about that here.

Sam Ro is the founder of Follow him on Twitter at @SamRo

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