Inflation Eases Again in June as Labor Market and Broader Indicators of Growth Show Signs of Slowing

Key Takeaways:

• Nonfarm payroll employment increased by 206,000 in June, while estimates for the two prior months were revised downward by a combined 111,000 jobs, according to the Bureau of Labor Statistics (BLS). Job gains were highly concentrated in noncyclical sectors, including government employment, which rose by 70,000, and health care, which increased by 49,000. The unemployment rate ticked up one-tenth to 4.1 percent, the highest level since November 2021. Average hourly earnings increased 0.3 percent over the month, bringing the year-over-year comparison to 3.9 percent.
• The Consumer Price Index (CPI) declined 0.1 percent over the month in June, causing the year-over-year comparison to fall three-tenths to 3.0 percent, the lowest in a year, according to the BLS. While the headline figure was aided by a 2.0 percent decline in energy prices for the second consecutive month, the disinflation was broad-based. Core CPI rose just 0.1 percent over the month and, compared to a year ago, increased 3.3 percent, the slowest rate since August 2021. Notably, both rent of primary residence and owners’ equivalent rent (OER) increased only 0.3 percent over the month, their slowest monthly gains in nearly three years. Other core services, including medical care and motor vehicle insurance, also registered lower readings compared to earlier in the year.
• The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings rose by 221,000 to 8.1 million in May, though this follows a downward revision to April’s data, according to the BLS. The quits rate was unchanged at 2.2 percent, where it has been since November 2023. Layoffs and discharges edged up to 1.65 million, though this remains well below the 2019 average.
• The Institute for Supply Management (ISM) Manufacturing Index declined two-tenths to 48.5 in June. While the new orders index rose 3.9 points, it remained below the expansionary threshold of 50 at 49.3. The production index declined 1.7 points to 48.5. The non-seasonally adjusted prices paid index fell 4.9 points to 52.1, its lowest level since December 2023.
• The ISM Services Index dropped 5.0 points to 48.8 in June, its second time below the expansionary threshold of 50 in three months. The business activity index fell by a sharp 11.6 points to 49.6, while the new orders index fell 6.8 points to 47.3.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index increased 1 point to 91.5 in June, its highest reading of 2024. On net, negative 25 percent of firms expect the economy to improve, the highest reading since July 2021. Plans to increase employment and make capital outlays were flat compared to last month. At 21 percent, inflation remains the top pick for the single most important problem small businesses are facing, though that is down 1 percentage point from last May.

Forecast Impact:

Considering revisions to prior months and another tick up in the unemployment rate, we believe June’s labor report indicates that labor demand is weakening. This is combined with JOLTS data showing a small pickup in layoffs, as well as unemployment insurance claims that have been gradually drifting upward in recent weeks. We have long expected labor market conditions to soften, so these reports will have little additional impact on our forecast. However, we note that the risk of a broader deterioration in labor market conditions is rising.

The June CPI reading was below consensus expectations and will lead to a downward revision to our near-term inflation forecast. While two reports do not definitively establish a trend, these data are no doubt encouraging. Given the long-awaited deceleration this month in shelter prices and better readings in other core services compared to earlier in the year, we believe sustained progress in reducing inflation can be achieved.

Other indicators from the ISM indices and the NFIB survey remain supportive of our forecast for somewhat below-trend economic growth through the rest of the year. The sharp drop in the services index in particular presents some further downside risk to our forecast, though we note that the ISM indices have generally been poor indicators of actual economic activity in recent years.

Nathaniel Drake
Economic and Strategic Research Group
July 12, 2024

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