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The labor market and services sector remain resilient, keeping the Fed on high alert
By: Edward Jones
After a strong first two quarters of 2023, markets stumbled a bit as we entered the first week of the third quarter. The S&P 500 was down slightly last week, while small-cap stocks underperformed large-cap equities.1 The key driver for this market disruption was stronger-than-
Nonetheless, in our view, the resilience in the labor market and services sectors makes the case for a recession or downturn in the near term unlikely. We continue to see some scope for a softening labor market in the months ahead, perhaps driven by a cooling in services demand. But the key for markets will likely be the direction of inflation, which we believe can continue to moderate further. In this backdrop, where inflation is moderating and the Fed is potentially moving to the sidelines and, over time, cutting rates, there is scope for both equity and bond markets to offer favorable returns.
Labor-market data continues to remain resilient, although some signs of softening emerge
The labor market has been a source of strength for the U.S. economy, even through the rapid rise in interest rates over the past 16 months, and this past week's data was no exception. Markets digested two key jobs reports for the month of June – ADP and nonfarm payrolls – both of which continue to remain resilient and support household consumption. First, the ADP private payrolls report for the month of June came in well above expectations, adding 497,000 jobs versus forecasts for 225,000.1 Of the jobs added, around 75% were in services sectors while 25% were in goods-producing sectors, with the biggest gains coming from leisure and hospitality.
Second, the June nonfarm payrolls report, while healthy, painted a somewhat softer picture. Total nonfarm jobs added in June were 209,000, below expectations of 230,000 and well below last month's 306,000 (which were also revised lower).1 Meanwhile, the average hourly wage gains continue to remain elevated at 4.4%, versus expectations of 4.2%.1 The Fed would like to see wage growth head toward 3.5% to remain consistent with a 2.0% inflation target.
Services sectors continue to expand
Perhaps one of the key themes that has emerged from recent data is that the services economy remains robust. Last week's ISM (Institute of Supply Management) data continued to show relative strength in services sectors, versus an ongoing contraction in manufacturing. Among the 18 services sectors, 15 expanded in June, including lodging and food services, and entertainment and recreation, building the case for an ongoing demand for services broadly.
Sources: 1. FactSet
Edward Jones - Mae Luchetti