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On Friday, all focus of the market was on the July NFP jobs report apart from China-Taiwan/US geopolitical tensions. Fed has almost confirmed the terminal rate of +3.50% -4.00% by Dec’22, the pace of rate hikes in September, November, and December will also depend upon the actual inflation/inflation expectations trajectory and also overall labor market conditions to some extent. Fed will also focus on wage growth to gauge whether wage-price inflation spirals out of control. If wage growth goes higher than productivity, it may cause more elevated inflation.
Thus the prime focus of job reports is on wage growth rather than headline job addition/employment numbers as the U.S. economy is now almost at maximum employment levels, but inflation is substantially above Fed’s 2% target for a considerable time. Fed wants to see some slowdown in the job/labor market so that demand as-well-as inflation cools to some extent.
On Friday, the latest BLS establishment flash data shows that the U.S. economy (public and private sectors; i.e. government and private jobs excluding the farming industry-Non Farm Payrolls-NFP) added +528K jobs in July against +398K jobs in June and much above market expectations of 250K. The July preliminary figure of 528K is the highest since the Feb’22 high of +714K but is lower than the July’21 NFP figure of 689K. Also NFP 3-months (May/June/July) rolling average is now around 437 against 564 last year (y/y).
Total NFP employment has increased by 22.0 million since hitting a trough in April’20 (COVID) and has returned to the pre-pandemic level.
Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +471K jobs in July from +404K sequentially (June), much higher than the market expectations of 230K. But July’21 private NFP job addition of +471K is also much lower than the July’21 figure of 638K. The 3-months private NFP rolling average is now around 402K against 509K in 2021 (y/y). But Private-sector NFP employment has recovered the job losses due to the COVID and is 629K higher than in Feb’20 (pre-COVID).
Government payroll; i.e. employment in government rose by +57K in July from -6K contraction sequentially (m/m); and +51K yearly (y/y). The July’22 Government NFP is the highest since May’21 but is still below its Feb’20 level by 597K. Over the month, employment increased by 37K in local government, mostly in education (27K). Employment in local government is still below its Feb’20 level by 555K, with the losses split between the education and non-education components. In July’22, the 3-month rolling average of government payroll was around 33K vs 7.6K sequentially and 55.33K yearly (y/y).
In July, notable private payroll job gains occurred in leisure and hospitality (96K), particularly in food services and drinking places (74K); professional and business services (89K), including management of companies and enterprises (13K), architectural and engineering services (13K), management and technical consulting services (12K), and scientific research and development services (10K); and health care (70K).
As per the establishment survey, the change in total nonfarm payroll (NFP) employment for May was revised up by +2K to 386K, and the change for June was also revised up by +26K to +398K. With these revisions, NFP employment in May and June combined is +28K higher than previously reported.
Overall, as per establishment survey data, in 2021, the U.S. public and private sectors have added around 6743K non-farm jobs, at an average monthly rate of 562K which is in line with the Fed’s estimates. As per preliminary estimates, the average NFP job additions for Jan-July’22 is now around 471K, much higher than the Fed’s estimate of 200K for the longer-term (goldilocks labor market) and average pre-COVID (2019) rate of around 168K.
As per the Household survey, which includes non-farm jobs/employees and self-employed persons (including contractors and agriculture), the U.S. economy has added +179K employed persons in July against the contraction of -315K sequentially (June). The average employment addition for 2021 was 512K. After July data, the number of employed persons in the U.S. (as per the Household survey) has reached 158290K in July from 158111K sequentially (June) and against pre-COVID (Feb’20) levels of 158735K; i.e. the economy is still short of -445K employed persons from the pre-COVID levels.
As per Household survey data, the U.S. economy has added 2315K employed persons against Establishment survey data job additions 3296K in 2022 (till July) after 6145K vs 6743K in 2021. The growing divergence between Household and Establishment survey data may be due to the growing number of multiple job holders.
As per Household survey data, the U.S. unemployment rate decreased to 3.5% in July, the lowest since Feb’20, from 3.6% sequentially, while the market expected it to be unchanged. The nominal number of the civilian labor force decreased by -63K in July to 163960K against subtraction of -353K sequentially and Feb’20 (pre-COVID) levels of 164448K. The nominal number of unemployed persons was 5670K in July, decreased by -242K sequentially and lower than Feb’20 (pre-COVID) levels of 5717K. If the civilian labor force of 164448K (pre-COVID) in Feb’20 is considered instead of the July’22 figure of 163960K, then July’22 unemployment rate would have been 3.7% instead of 3.5%.
The labor force participation rate decreased marginally to 62.1% in July from 62.2% sequentially. The labor force participation rate was 63.3% in Feb’20 (pre-COVID), still higher than July’22.
The U.S. Average Hourly Earnings (AHE) growth remains unchanged at +5.2% in July sequentially and higher than market expectations of +4.9% gains (y/y). On a sequential (m/m) basis, the AHE grew by +0.5% in July from +0.4% in June, and higher than the market expectations of +0.3%. The AHE for all employees on private nonfarm payrolls in the US increased by +$0.15 to $32.27 in July, while the AHE of private-sector production and nonsupervisory employees rose by +$0.11 to $27.57. The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payrolls was unchanged for the 5th month in a row at 34.6 in July, above the market expectations of 34.5.
Average Weekly Earnings (AWE) were $1116.54 in July against $1111.35 sequentially (+0.5%) and $1067.32 yearly (+4.6%). This translates to average monthly earnings of around $4466.17 in July vs $4445.41 sequentially (+0.5%) and $4269.26 yearly (+4.6%). The average monthly sequential growth of AWE is now around +0.4% against CPI growth of +1.00%; i.e. there are still now no wage-inflation spirals and real wage growth is negative.
On Friday, Wall Street Futures, and Gold slumped, and the USD jumped on better-than-expected/blockbuster July NFP job additions (as per establishment survey data) along with positive revisions for May and June. But as per Household survey data number of employed persons in the U.S. increased by only +179K in July after -315K contraction in June and +321 additions in May. As per Household survey data, employed persons in the U.S. increased by 2315K in 2022 (till July) with an average monthly run rate of 331K. As per Establishment survey data, the U.S. economy has added around 3296K jobs/Employees on non-farm payroll in 2022 (till July provisional) with an average monthly run rate of 471K.
The huge divergence between these two surveys may be increasing multiple job holders due to economic as-well-as scarcity of required skills. Thus, although the number of employees on NFP is increasing in a rapid pace, the number of employed persons is not. The same person may be on payroll (as employees) for two or more jobs (doing part times) as per Establishment survey data, but he/she is being counted as one employed person as per Household survey data. Also, there was a huge year-end/seasonal adjustment every year in both surveys, especially in Households. In Jan’22, as per Household survey data, the U.S. economy has added 1199K employed persons against 504K job/employee on NFP additions by Establishment survey. So expect a similar seasonal/yearly adjustment this time too in Dec/Jan. Also, no President will like to face an election, even mid-term (Nov’22) with a weak labor market along with technical recession and elevated inflation. The U.S. economy is now in a stagflation-like scenario but expects similar blockbuster NFP job data in August, September and October also (till 24th Nov mid-term election) followed by some ‘seasonal adjustments’ in November and December to a possible alignment with the Household survey data.
Fed goes by Household survey data and related unemployment figures for its maximum employment mandate. As per the Household survey, the U.S. economy subtracted -168K employed persons cumulatively in the last 4-months (Apr-July). Fed Chair Powell also pointed out this in his post-POMC presser/Q&A on 27th July. Fed is now pointing to some slowdown in the labor market in terms of Employed persons, and the number of job offers available ratio.
Also, the overall job report as per the Household survey for the last seven months may be termed as goldilocks, as the average monthly run rate comes down to 331K against the 2021 average of 512K, which the Fed is pursuing even after a very much tight labor market, where demand is much higher than supply.
In any way, Fed is on the way to hiking +0.50% or +0.75% in September followed by +0.50% or +0.25% each in November and December irrespective of labor market conditions as inflation/price stability mandate is now its prime objective. Fed is quite upbeat about the U.S. economy/labor market despite 40 years of high inflation. Fed still believes in a softish landing. But Fed is quite concerned about sky-high inflation and inflation expectations for 1Y.
Thus Fed goes for a restrictive/jumbo hike of +0.75% in June and July to bring down inflation expectations meaningfully. Now Fed is set for +0.50% or +0.75% rate hikes in September depending on the inflation trajectory. Then Fed may go for +0.25% or +0.50% rate hikes in November and December subject to the inflation trajectory. Fed may also go for +0.75% rate hikes in November and December if inflation accelerates further.
Overall, the Dec’22 terminal rate may be +4.00% to +4.75% as per the actual inflation trajectory, if Russia-Ukraine/NATO geopolitical tensions and subsequent economic sanctions continue. Moreover, if China invades Taiwan, then it will result in another wave of economic sanctions and supply chain disruptions, resulting in elevated inflation.
The July NFP job report may be a blockbuster if we consider the Establishment survey data. After the NFP headline, the FFR put more probability of another +75 bps rate hike by Fed in September, and thus Gold, Wall Street Futures crumbled, while USD surged. But if we go through Household survey data, which Fed follows, the overall job/labor market is mixed. But even then, it will not change Fed’s plan for rate hikes in the coming months as Fed will solely go by inflation data. Thus the overall impact of July NFP job data is quite limited even after the usual volatility (knee-jerk reaction). Wall Street Futures recovered at EOD along with Gold to some extent, while the USD slips from the NFP top.
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