—Soft landing confidence growing
submitted by
Uric Dufrene, Ph.D., Interim Executive Vice Chancellor for Academic Affairs, Sanders Chair in Business, Indiana University Southeast
The BLS released the monthly employment report last Friday, and the headline number surpassed all expectations. The jobs report showed that the economy gained 339,000 jobs in May. The consensus estimate was under 200,000. For the past couple of years, a “good news” report was usually met with a swift negative reaction in the equity markets. “Good news” from economic indicators provided additional justification for the Fed in hiking interest rates. Conversely, “bad news” was often met with positive reactions in the equity markets. In this case, equity markets were overwhelmingly positive, with the Dow finishing up more than 2% for the day.
However, the report did have some evidence supporting a possible Fed pause in June. The unemployment rate increased by 3/10ths of a point, jumping from 3.4% to 3.7%. Unemployment rolls swelled by 440,000, and the labor force saw an additional 130,000. So, the household survey supported the argument of continued softening in labor markets. This was not a recession marker necessarily, but additional data in support of a continued slowing of employment growth. Another piece supportive of a rate pause at the next Fed meeting came with the earnings data. Average hourly earnings declined by a tenth of a point from April, and the May number was slightly under consensus. Recent Fed speakers also signaled a pause for the June meeting. The CME Fed Watch Tool is currently showing about a 75% probability of a pause for the June meeting. So, the combination of robust job growth, and concomitantly, with an eventual softening of labor markets and wages, resulted in the breakout market reaction.
Job openings had been declining the past several months, but the last Job Openings and Labor Turnover Survey showed a reversal in this trend. The report showed that openings increased back to over 10 million, and 625,000 more than the number expected. This tightness also shows up in unemployment claims, with numbers showing no significant acceleration in claims.
The BLS released the last quarter of 2022 county level employment data, and Southern Indiana continues to see steady payroll growth. Almost 4,000 jobs were gained compared to the previous year, marking seven consecutive quarters of payroll growth. Excluding the large change in jobs that appeared in 2021 due to base effects, this last quarter of 2022 is the second highest level of payroll growth since the negative Covid-induced job changes.
Leading the way was accommodation and food services, gaining more than 1,500 jobs. This industry has fully recovered with respect to payrolls levels, and jobs now exceed the number that existed just prior to Covid by more than 1,000. Health care and social services added 1,200 jobs, followed by solid growth in manufacturing of 450. The region did see a decline in average weekly wages, the first decline since 2017. This decline is likely due to the large increase in accommodation and food services for the quarter. Accommodation and food services is about one half of overall average weekly wages. So, a big pick up in accommodation and food services will bring the overall average down.
How can we put all this in a nutshell? The economy continues to show resilience. We are not in a recession, and more confidence is setting in that there will be no recession this year. Everything is not that rosy. Indicators are still pointing to some slowing in the economy, but it looks like any slowdown will be quite shallow. For what it’s worth, my economic outlook from this past November expected a recession in the last quarter of 2023 or the first half of 2024. Confidence is growing that any recession is pushed back to 2024, and a soft landing is looking better and better.
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