Unemployment Rate Rises and Wage Growth Slows

Key Takeaways:

• The Federal Open Market Committee (FOMC) held the federal funds rate at its current target range of 5.25-5.5 percent at its July 30-31 meeting. The committee is continuing to run off its balance sheet as previously announced. In his press conference, Chair Powell noted that a September rate cut "could be on the table" and noted further progress on inflation. Powell also stated that risks to the Fed’s dual mandate of achieving stable prices and maximum employment were coming into better balance.
• Nonfarm payroll employment increased by a muted 114,000 in July, according to the Bureau of Labor Statistics (BLS). While private education and health services added a strong 57,000 jobs, several sectors including temporary help services and information lost jobs on net. Average hourly earnings increased 0.2 percent over the month and slowed to 3.6 percent compared to a year ago. The unemployment rate rose two-tenths to 4.3 percent, its highest level since October 2021 and six-tenths above its January level.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 46,000 to 8.2 million in June but were revised upward in May by a more-than-off setting amount, according to the BLS. The quits rate, a leading indicator for wage growth, was flat at 2.1 percent, two-tenths below its pre-pandemic level. Layoffs and discharges declined to 1.5 million from an upwardly revised figure in May, though both remained well below the average level in 2019.
• The Employment Cost Index (ECI), a measure of labor compensation, increased 0.9 percent in Q2 2024, a deceleration compared to the first quarter, according to the BLS. Compared to a year ago, the ECI increased 4.1 percent, its lowest reading since the fourth quarter of 2021.
• Nonfarm business productivity increased at a 2.3 percent annualized rate in Q2 2024, a sharp acceleration compared to Q1, according to the BLS. Compared to a year ago, productivity rose 2.7 percent, a slowdown of two-tenths compared to the first quarter.
• The Institute for Supply Management (ISM) Manufacturing Index fell 1.7 points to 46.8, its fourth consecutive monthly decline and the lowest level since December. The production index was down 2.6 points to 45.9, its lowest level since the onset of the pandemic, while the new orders index was down 1.9 points to 47.4. The non-seasonally adjusted prices paid index was roughly flat at 52.9, while the supplier deliveries index rose 2.8 points to 52.6, indicating slower delivery timelines.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closed sales by one to two months, rose 4.8 percent to 74.3 in June, the highest level since March.
• The FHFA Purchase-Only House Price Index was flat on a seasonally adjusted basis in May. Compared to a year ago, prices rose 5.8 percent, a slowdown of eight-tenths compared to April.

Forecast Impact:

The labor report came in somewhat below consensus and our expectations. The overall slowing in the labor market is broadly in line with our expectations for below-trend growth in the second half of the year, but the pace of that slowing appears to be accelerating. Historically, it’s been difficult to prevent further labor market deterioration once the unemployment rate has already increased by more than half a percentage point in a short period of time. Other labor market data this week signaled normalization, though it references a period before the latest July employment report. As it stands right now, Q2 2024 ECI is already near a level that would be consistent with 2 percent inflation over the long run, assuming productivity growth around 1.5 percent. Given further signs of slowing wage growth in July’s employment report suggesting minimal inflation pressures from wage gains, markets are currently pricing in a more than 70 percent chance of a 50-basis point cut at the FOMC’s September meeting, presenting some risk to our base-case forecast of a 25-basis point cut.

Pending home sales rose in June, coinciding with a gradual easing in mortgage rates. This is in line with our forecast for a slow-but-steady recovery in existing home sales as the year progresses and mortgage rates continue to ease modestly.

Nathaniel Drake
Economic and Strategic Research Group
August 2, 2024

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