Economic Update: July 2023

Black unemployment, sadly, ticked up again in June for the second straight month. After reaching a record low in April at 4.7%, it rose in May and then again in June to 6%. A large body of evidence shows that Black workers are the first to lose their jobs when the economy softens, though economists caution that month-to-month data on race can be volatile.

A significant share of last month’s gains were in the government sector, which added 60,000 jobs. State and local governments, after struggling to staff post-pandemic, made significant land grabs in June. Government employment grew at twice the 2022 pace in the first half of the year, as well as public schools and hospitals. Construction also saw robust gains, adding 23,000 jobs, in spite of rising interest rates.

Average hourly earnings increased in June, rising by 4.4% over the year, to $33.58 per hour. In fairness, average hourly earnings only rose 0.36% from the previous month earlier, (just barely exceeding the 0.3% forecast) and increased 4.35% from June 2022 (compared to a forecast of 4.2%). However these earnings gains are still well above the 3% to 3.5% target that’s in line with a 2% inflation goal, and Fed policymakers are closely monitoring all signs of wage growth.

June’s data accentuated labor market themes that have been with us for months: while job growth is progressively tapering, wage growth persists and unemployment remains low at 3.6%. Overall we’re seeing signs of cooling alongside a labor market that remains unusually resilient. In fact, economists have monikered June’s data the “Goldilocks Report”: not too hot, not too cold. Let’s look at some available evidence. While job openings are in fact cooling, the reported 9.8 million openings in May is still high by pre-pandemic standards. In 2019, for example, the monthly totals generally lingered around seven million. The economy has remained resilient likely because most of the U.S. economy is made up of services industries that tend to be less impacted by interest rate hikes. And despite elevated inflation and high rates, industries that are typically more susceptible to rising borrowing costs appear to have adjusted somewhat. For example, mortgage rates have nearly doubled since 15 months ago, but in recent months, housing has shown signs of reviving.

Simultaneously things are clearly slowing down. An obvious indicator that hiring is easing is that fewer industries are adding jobs. Excluding government hiring, private-sector job gains totaled only 149,000 in June, not exactly gains of a blistering pace. There are also other signs of cooling such as the “U-6 unemployment rate”, a measure of labor market underutilization that includes those working part time even though they would prefer full-time work. In June the U-6 climbed to 6.9%, the highest seen since August 2022.

And on the horizon, hopefully more good signs that will appeal to the Fed. This week, the Labor Department is expected to report that overall inflation fell to about 3% in June, the lowest in two years. Removing volatile food and energy prices, core inflation is expected to scale down to around 5% from 5.3%, an 18-month low. Economists also think core inflation could continue to abate to between 3.5% and 4%, in the coming months. The less good news is that reducing inflation further towards the Fed’s 2% target will prove more challenging if the economy keeps steaming ahead. The final stretch may prove more arduous (except for…*eyeroll*… those experiencing a “richsession”).

With all that being said, more expert chatter is coalescing around the U.S. sticking its much anticipated soft landing. Last fall Bloomberg Economics forecast a 100 percent chance of a recession by October, but has pivoted to suggest we’ll “narrowly dodge” a downturn in 2023. Only about two months ago 47% of economists working for corporations were predicting a recession by the end of the year.

“As long as the economy continues to produce more than 200,000 jobs a month, this economy is not going to slip into recession”, noted Joe Brusuelas, Chief Economist at RSM.