Potential Signs of Relief in the Labor Market

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

We’ve been making the case during the past several weeks that, while unlikely, a narrow path remains for the economy to glide into a soft landing. To achieve a fabled goldilocks economy, our thesis called for declining demand for labor and a rise in the labor participation rate (more people joining the workforce). Those two elements would then result in easing of wage pressures, which would allow the Federal Reserve to end its rate hike cycle. While we remain skeptical that the economy will stick a soft landing, last week’s economic data offered some encouraging news.

The latest Jobs Openings and Labor Turnover Survey showed the number of new positions created in July declined by 338,000 from June’s downwardly revised reading, resulting in 8.8 million unfilled positions, below consensus Wall Street estimates. The latest reading marks the third consecutive month of declines and the lowest level of monthly openings since March 2021. The so-called “quits” rate, which is viewed as a proxy for the level of confidence employees feel about the job market, came in at 2.3 percent, down from June’s reading of 2.4 percent and the lowest reading since January 2021. Notably, the industries that saw the greatest decrease in quits were on the services side of the economy, including food services and arts, entertainment and recreation. The services side of the economy has been resilient and has been a source of employment strength for several months. While it is too early to tell with any certainty, the declining number of quits on the services side of the economy may point to slowing growth.

The nonfarm payroll report for August released late last week by the Bureau of Labor Statistics indicated that hiring remained strong with 187,000 new positions added—above Wall Street expectations of 170,000; however, the previous two months’ new hire totals were revised downward by 110,000. The report also showed that labor participation grew. Importantly, the latest reading showed that labor participation increased to 62.8 percent, the first increase since March of this year and the highest level since February 2020, just before the economy shut down due to COVID. The increase in labor participation caused the unemployment rate to unexpectedly climb to 3.8 percent, up 0.3 percent from the prior reading. While the current participation level remains below the 63.3 percent mark registered just prior to the onset of COVID, we believe if recent gains continue, the increased participation will alleviate the wage pressures that the Federal Reserve continues to view as a concern. Average hourly earnings for production and non-supervisory employees rose by 0.2 percent from July and are up 4.5 percent year over year. While still elevated, wage pressures have fallen over the past 17 months since hitting the 7 percent level in March of 2022.

Consumers also appear to be sensing an easing in the job market. The latest Consumer Confidence Index report from the Conference Board contains a section that measures how easy or difficult respondents find it is to land a job. In August, those saying it was hard to find a job rose to 14.1, up from July’s level of 11.3. Conversely, those who believe jobs are plentiful fell to 40.3 from July’s reading of 43.7. The gap between those who find it hard or easy to get a job is called the labor differential, something we’ve been tracking closely due to the Fed’s focus on the employment picture. August’s labor differential narrowed to 26.2, down from 32.4 in June. It’s worth noting that persistent narrowing of the differential has historically preceded a rise in unemployment. The latest reading suggests that, while still tight, the labor market may be showing some signs of loosening.

While it is too early to conclude whether the data out last week marks the beginning of a sustained easing of the employment picture, it could provide the Fed with some breathing room to let current rate hikes take effect before it is faced with the need to raise rates further. Unfortunately, we believe that the lagging effects of the Fed’s 11 rate hikes have not fully made their way through the economy. As liquidity continues to dry up, we believe spending levels will come down and, unfortunately, unemployment will potentially rise, tipping the economy into a mild recession. Fortunately, with inflation falling as it has, the Fed should have room to cut rates to soften the blow of an economic downturn.

Wall Street Wrap

Long-term jobless claims move higher: Weekly jobless claims were 228,000, down 4,000 from last week’s upwardly revised figure. The four-week rolling average of new jobless claims came in at 237,500, increasing 250 from the previous week’s upwardly revised average. Continuing claims (those people remaining on unemployment benefits) remain elevated relative to last year’s levels at 1.725 million, up 28,000 from the prior week’s reading.

More on consumer confidence: Consumer confidence fell in August as concerns about rising prices reemerged and consumers grew less optimistic about future economic conditions. The Conference Board’s consumer confidence index declined to 106.1 from the previous month’s downwardly revised reading of 114. The latest reading breaks a two-month streak of improving levels.

Manufacturing recession continues: The latest data from the Institute of Supply Management (ISM) shows the manufacturing sector notched a tenth consecutive month in contractionary territory. The composite reading for the index came in at 47.6, up from July’s reading of 46.4 (readings below 50 signal contraction). New orders declined, coming in with a reading of 46.8, down 0.5 from the prior month’s 47.3. Employment moved higher but remains in contractionary territory at 48.5. While the data in total indicates manufacturing continues to struggle, the latest readings point to some stabilization. In a statement accompanying the latest data, Tim Fiore, Chair of the ISM, noted, “Demand remains soft, but production execution is consistent with new, reduced output levels based on panelists’ companies’ order books. Suppliers continue to have capacity. Prices are generally stable.”

Long-term trend of housing prices remains subdued: The latest S&P CoreLogic Case-Shiller Index shows home prices climbed 0.7 percent in June on a seasonally adjusted basis from the prior month, marking the fifth monthly increase in a row. June’s reading shows home prices were flat on a year-over-year basis; however, the survey’s 20-city composite indicates home prices declined 1.2 percent year over year, compared to May’s 1.7 percent year-over-year drop. While recent data suggests the year-over-year pace of price decreases may be plateauing, we believe high interest rates will continue to cause affordability issues for potential buyers and limit upside price movements until either supply or household incomes increase or rates ease.

Inflation pressures edge higher: The latest Personal Consumption Expenditures (PCE) price index from the Bureau of Economic Analysis shows core inflation edged up 0.2 percent in July and is up 3.3 percent year over year compared to June’s 12-month rise of 3.0 percent. The index, which is the Federal Reserve’s preferred measure of rising costs, shows core inflation, which excludes volatile food and gas, stands at 4.2 percent year over year in July, up from June’s reading of 4.1 percent. Once again services inflation was the driving force in the increase, with prices for services rising 5.2 percent year over year.

The week ahead

Tuesday: The latest readings on July factory orders will be released today by the U.S. Census Bureau.

Wednesday: The ISM releases its latest Purchasing Managers Services Index. Recent readings have shown growth in the sector slowing, and we will watch for any signs of additional weakening.

The Federal Reserve will release data from its Beige Book. The book will provide recent anecdotal insights into the nation’s economy and will highlight emerging regional economic trends.

Thursday: Initial and continuing jobless claims will be announced before the market opens. Initial filings were down modestly last week, and we will be watching to see whether last week’s decrease was a temporary blip or a sign of continued strength in the job market.

Friday: The Federal Reserve will release its latest look at the financial condition of consumers through its Consumer Credit report. Consumers have begun to take on more credit card debt in recent months, but overall balance sheets have remained strong. We will be watching for changes in debt levels in light of recent estimates that the financial cushion many consumers built during COVID is on the verge of being exhausted.

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