July employment ‘shock’ refutes recession rhetoric, encourages a September rate hike
By Larry StewartAugust 10, 2022
Wells Fargo Securities led its analysis of last week’s monthly release of employment data by the U.S. Bureau of Labor Statistics (BLS) with, “If the U.S. economy is in a recession, no one seems to have told employers.”
“Today’s employment report was expected to show an economy not yet in recession but at least headed in that direction,” said Anirban Basu, chief economist with the Associated Builders and Contractors (ABC).
“Shockingly, that did not come to pass, as U.S. employers added 528,000 jobs in July, more than twice the consensus forecast of 250,000, and the unemployment rate across all industries fell to 3.5%, tied for the lowest rate since the late 1960s.”
The National Association of Home Builders (NAHB) says more than 3.3 million jobs were created, and monthly employment growth averaged 471,000 per month since the first of 2022.
As of July, total nonfarm employment is back to pre-pandemic level in February 2020, meaning U.S. labor market is fully recovered from the Covid-19 pandemic.
Employment growth was broad-based with nearly all major sectors adding jobs, led by gains in leisure and hospitality (+96,000), professional and business services (+89,000), and health care (+70,000). Average hourly earnings data added to the argument against recession, increasing 0.5% in the month and 5.2% over the past year.
Construction employment blazing
The BLS estimated the construction industry added 32,000 jobs on net in July, following a 16,000-job gain in June. Compared to July 2021, construction employment has increased by 311,000 jobs, or 4.2%, according to ABC analysis.
Residential construction gained 14,100 jobs, taking total residential construction employment above its pre-pandemic point in February of 2020. Residential construction employment now stands at 3.2 million, broken down as 902,000 builders and 2.3 million residential specialty trade contractors.
The NAHB says the six-month moving average of job gains for residential construction was 11,900 a month. Over the last 12 months, home builders and remodelers added 120,800 jobs on net. Since the low point following the Great Recession, residential construction has gained 1,186,500 positions.
Nonresidential construction added 18,300 positions on net last month. Nonresidential employment growth by subsector:
- Specialty trades: 10,300
- Building: 4,900
- Heavy and civil engineering: 3,100
“Yes, the construction industry also added a healthy number of jobs in July, but the impact of macroeconomic deterioration is already apparent in other construction data,” said Basu.
“To date, the residential segment has felt the brunt of rising borrowing costs, with mortgage applications recently declining to multidecade lows. But ongoing weakness in certain commercial real estate segments, sky-high materials prices, and shortages of skilled construction workers have forestalled a growing number of projects. The industry’s labor supply remains severely constrained; the construction unemployment rate fell to 3.5% in July, the fifth lowest rate in the 22-plus years for which the Bureau of Labor Statistics has data.
Basu continued, “While backlog remains elevated from a year ago, according to ABC’s Construction Backlog Indicator, this may have as much to do with the fact that projects are taking longer to complete than with underlying economic strength. The expectation is that backlog will begin to fade for many contractors as the economy becomes less supportive. At the heart of the issue is the Federal Reserve, which will continue to raise interest rates as long as the labor market retains this level of momentum.”
Labor force not cooperating
The preferred way to tamp down rising wage pressure’s effect on prices would be for labor supply to increase, rather than having to squash demand for workers. More labor participation would be better for economic growth. But today’s labor market is not cooperating.
Despite extraordinary demand for workers, the labor-force participation rate slipped a tick, continuing a slide that began this spring. A second consecutive decline in the labor force helped push the unemployment rate to 3.5% – matching its 53-year low.
The Fed remains in overdrive
“The July employment report increasingly stands apart from a wide range of indicators that show labor market conditions weakening,” says Sarah House, Senior economist with Wells Fargo Securities. “Yet it is arguably the most integral in forming Fed officials’ assessment of the labor market.”
Chairman Jerome Powell and the Federal Open Market Committee (FOMC) need job growth to slow enough that the “extremely tight” labor market cools but not so much that unemployment rises enough to push the economy into a recession.
“Employment growth of more than half a million new jobs per month is clearly not a sustainable pace of job creation at this point in the cycle,” says House. “Perhaps even more concerning for the Federal Reserve is that wage growth looks to be increasingly sticky around 5.0% to 5.5% on an annualized basis, which is roughly a percentage point or two above what would be consistent with the Fed’s 2% inflation mandate.
“Threading this needle will be difficult, and we suspect the FOMC will be inclined to put more weight on the price-stability half of its mandate if push comes to shove. At least a 50-basis-points rate hike at the September 20-21 FOMC meeting seems likely at this point in time, and yet another 75 bps hike could be in store if inflation over the next two CPI reports shows no signs of trending lower. Additional monetary policy tightening should eventually slow nonfarm payroll growth in the months ahead, and our base case still includes a mild recession that begins early in 2023.”