Labor Market Checkup: June’s Nonfarm Payrolls Report Reflects Economic Vigor

As the clock strikes 8:30 AM ET today, the world’s focus will be riveted to the Labor Department’s nonfarm payrolls report. Market experts predict the report will display an addition of 225K jobs to the U.S. economy in June, a decrease from May’s unexpected spike of 339K. Notably, the latter was the second most robust month for job creation this year. Despite the slightly reduced figure for June, it’s noteworthy that over the past year, the monthly figure has consistently outperformed expectations, with just one exception. The current estimate, however, falls behind the six-month average of 314K, highlighting the intense dynamism of the labor market.

The Fed’s Focus: Labor Market and Inflation

Jerome Powell, Chairman of the Federal Reserve, has clarified that the fight against inflation is far from resolved. His reasoning? “This economy is very strong, and what’s driving it is a very strong labor market.” Therefore, some slackening in the labor market would be required for inflation to draw closer to the Fed’s target of 2%. Besides the ongoing labor shortage, the Fed will also be closely observing wage growth. It’s predicted that average hourly earnings will increase by 0.3% M/M in June, maintaining the rate from the preceding month. However, year on year, this figure is expected to drop slightly to 4.2% from 4.3%.

Assessing the Impact of the Fed’s Inflation Strategy

Despite the Fed’s firm determination to curb inflation, it significantly increased its benchmark rate to a target range of 5.0%-5.25% from near-zero within just over a year. Data from this week reveals a tightly knit labor market. Private hiring, according to Thursday’s ADP measure, shattered predictions, while the Challenger Job Cuts Report indicated a considerable decline in job cuts. This positive news led Treasury yields to skyrocket. Conversely, the JOLTS report indicated a drop in job openings, and the quits rate nudged up to 2.6%. Additionally, the number of Americans submitting initial jobless claims saw an uptick over the past week.

Deciphering the Market Response

SA analyst Christopher Robb predicts a “substantial rally” leading to new local highs if the NFP reading is lower than anticipated. However, he notes that a significant downturn could only be triggered by a shortfall far beyond expectations, akin to what was observed in the ADP report. Eric Basmajian, Investing Group Leader of EPB Macro Research, advises investors to scrutinize the labor market report in three sections: cyclical economy, total economy, and non-cyclical economy. He explains, “If we see more weakness in the Cyclical Employment sectors, we can say with a higher level of confidence that recessionary conditions are taking hold, and significant business cycle risk lies immediately ahead. However, if the Cyclical Employment sectors do not exhibit an increasing pace of deterioration, then that could certainly delay the onset of the recession.“