Still Working: Labor Market Remains a Source of Optimism

DEWITT, Mich. - June 7, 2022 - PRLog -- The labor market has been the cylinder of the economic engine that continues to fire, even as the Fed applies the brakes to address ongoing inflation pressures. The economy is slowing, to be sure, and our cyclical dashboard contains a few flashing yellow lights, reflecting the impacts of rising consumer prices, higher interest rates, ongoing supply-chain bottlenecks, and slightly tighter financial conditions.

But we think the prevailing narrative that the economy is quickly careening into the ditch is too pessimistic, and the latest read on the jobs market tells us there is still some fuel in the tank that can keep us moving forward this year. Here are three takeaways from last week's employment report:

1. Healthy job growth supports a reasonably favorable outlook for the consumer.

• The economy added 390,000 jobs in May, exceeding consensus expectations of 322,000.  The largest gains were in the leisure & hospitality industry (+84,000) while other notable areas of strength were business services, construction and manufacturing.
• There were signs that labor shortages may be easing somewhat, with 330,000 workers entering or rejoining the labor force, with the majority of that increase coming in the 25–54-year-old cohort. We suspect the combination of higher wages, fading pandemic restrictions, and lapsing stimulus will support further improvement in the workforce participation rate.

2. Unemployment rate not heralding a coming recession.

• The unemployment rate held steady at 3.6% in May, the best rate since the pandemic and just a shade above a half-century low.  Low unemployment is obviously helpful to consumer spending (by way of supporting both incomes and confidence), but no recession in the last 50 years (excluding the pandemic) has begun with an unemployment rate below 4% (the average was 5.5% and the lowest was 4.3% at the onset of the 2001 recession).

3. Wage gains will keep the Fed on its path of upcoming rate hikes.

• While healthy job growth and low unemployment headlined the May employment report, the latest read on wages was equally important to the market narrative.  Average hourly earnings were up 5.2% over the prior year, which tells two stories:
  1. Wage growth remains sufficiently robust to lift household income and spending, supporting the prospects for further economic growth.
  2. Wage growth remains sufficiently robust to support ongoing inflation, supporting the prospects of further rate hikes.
• In other words, we find ourselves in the precarious position where the market is looking for healthy wage growth to support the economy, but not so healthy that it continues to stoke too-high inflation.  We think the combination of the wage-growth rate and the wage-growth trend suggest this precarious position could play out in the coming months.