OHI - July Jobs Report: Labor Market Cools But Still Stronger For Longer

2023-08-04 11:09:11 ET

Summary

• U.S. employers added 187K workers in July, below expectations of 200K but above June's revised 185K.
• The unemployment rate ticked lower to 3.5%, while the labor force participation rate remained at 62.6%.
• Average hourly earnings grew 4.4% in July from a year earlier, above expectations and still well above the pre-pandemic pace.
• The continuing demand for workers is indicative of a "stronger for longer" labor market. This will likely remain a confounding challenge for the Federal Reserve.

Federal Reserve Chairman, Jerome Powell, has a lot to think about. One can add the recent debt downgrade somewhere to the list. Add it anywhere except at the top, a spot likely still reserved for the labor market following Friday’s fresh employment data.

How Many Jobs Were Added In July?

The Bureau of Labor Statistics (“BLS”) jobs report showed that non-farm payrolls increased by 187K in July, down from June’s gain of 209K and moderately below the 200K economists were looking for .

The report also included downward revisions to data from the prior two months. The revisions amounted to a combined 49K fewer job additions than previously reported. July's reading does represent an increase from June's revised 189K.

Average job growth continues to be weaker than last year, with the current additions well below the average monthly gain of 312K over the last twelve months. The data support the notion that the labor market is cooling. But the figures are likely still too strong for the Federal Reserve.

Did The Unemployment Rate In July Go Down?

The unemployment rate fell to 3.5% from June’s 3.6%. This is not far off the historic low of 3.4% attained earlier in the year. By one measure, the rate has a way to go in meeting Fed policy makers’ expectations. For example, their median projection for the unemployment rate in the final quarter of 2023 is 4.15%. That’s a tough sell, given demand for workers remains robust. My expectation is that unemployment will remain below 4% through the remainder of the year.

What Industries Gained Jobs In July?

Hiring is still robust in several key sectors. In Healthcare, employers added 63K jobs in July following 41K of additions in June. The gains were also above the average monthly gain of 51K over the prior twelve months. And with about 16.9M employees, employment in the sector exceeds the 16.4M pre-COVID peak.

But are the sector gains enough? Labor shortages in the sector are improving but it remains a headache for industry participants. CEO, Taylor Pickett, from skilled nursing and assisted living real estate operator, Omega Healthcare’s ( OHI ), cited labor as one challenge still faced by the company on their recent release. This echoes the commentary made on their past discussions .

To overcome not only current challenges but those in the coming years, such as those associated with an aging population, employment in the sector will likely need to be significantly higher than where it stands now. For perspective, there were about 1.8M job openings in the sector in June. That represents nearly 20% of overall openings for the month. Filling these jobs would do little to appease those seeking a cooldown in current growth rates.

Other sectors continuing to see growth includes construction, which added 19K jobs, just above the twelve month average. Sector momentum continues to build on a favorable demand outlook due in part to the recent +$1.0T infrastructure bill.

Caterpillar ( CAT ), for example, recently beat revenue expectations by +$770M on YOY growth of 22% by and large because of the ramp up in major infrastructure projects. Further sector gains in the months ahead would not be unexpected.

Payroll growth also continued in social assistance and financial activities, who together added 43K jobs. Other sectors were about in-line with averages. Wholesale trade, however, did increase by 18K following little change in recent periods.

Despite positive travel trends, employment in leisure and hospitality remains well below its pre-pandemic level by 352K jobs or 2.1% below target. Gains during the month did little to move the needle, with just 17K during the month. This compares to the first quarter of the year, where the sector had average monthly gains of 67K.

How Much Did Hourly Wages Increase In July?

The strong overall demand for workers continues to put upward pressure on wages. Average hourly earnings in July rose 14 cents to $33.74, bringing wage gains over the past twelve months up to a total of 4.4%, more than the 4.2% expected.

The persistent growth in wages is a primary complication for the Fed. But there are some signs that wage growth may begin to soften further. Earlier in the week, the Labor Department reported that a seasonally adjusted 3.8M people quit their jobs in June, resulting in a quit rate of 2.4%. While this is still elevated in relation to pre-2020 levels, the rate is down from May’s 2.6%.

Looking at the quit rate is worthwhile because often people quit to take a higher paying job elsewhere. It is reasonable, then, to associate a higher quit rate with higher wage growth. If the downward trend in the quit rate continues, I would expect wage growth to decline in-kind.

The counter that offsets this viewpoint is the number of unfilled job openings. In June, there were 9.6M job openings. Though lower than in May, it’s still well above the number of people unemployed. Labor force participation at, 62.6%, is also below pre-pandemic levels of about 63%. Over time, elevated unfilled openings and lower participation may lead employers down the road of increasing incentives to fill positions. This could create further upward pressure on wages.

How May Markets And The Fed React To The July Jobs Report?

The latest jobs and wage data continue to show that economic activity isn’t slowing as much as Fed officials expected. Some sectors, such as construction and healthcare, also appear to have a long runway for further employment gains. The uptick in leisure and hospitality is also indicative of the positive travel trends seen over the past several months.

Following the jobs report, stocks were mixed in pre-market trading. Both the Dow Jones Industrial Average ( DJI ) and the Nasdaq ( NDX ) were up about 50 points, while the S&P 500 ( SPY ) was more flat. The movement in the markets followed selling pressures built up in recent days following the downgrade of the United States’ long-term rating to AA+ from AAA by Fitch Ratings.

In July, the Fed raised the benchmark federal-funds rate to a range between 5.25% and 5.50%. This represented a 22-year high and their eleventh rate rise since March 2022. The July jobs report may increase the conviction of those who prefer a more hawkish approach to rate policy.

In prepared remarks at an event at Columbia University in early July, Dallas Fed President, Lorie Logan cited the hotter-than-expected labor market through the first half of 2023 as reason enough for a more restrictive monetary policy. It’s unlikely the current print will have changed her viewpoint.

But for those not looking to rush to a conclusion, it helps that the Fed’s next meeting is not until later in September. This means officials will have more economic data and another jobs release to digest before their decision. I don’t believe economic conditions will materially change over this period. But it’s extra time to assess, nonetheless.

My Prediction

The number of jobs added in July was lower than expected. But wage growth came in higher. This may raise support for a rate hike in September. But policy makers have a mulligan in the August report and other economic indicators prior to then. Barring an economic shock, however, the labor market is likely to remain “stronger for longer.” Excess job openings and elevated quit rates support this notion.

And ultimately, data on employment may lose its luster among investors as the focus increasingly reorients back to stock valuations. It’s food for thought for investors, but perhaps not the most appetizing for the Fed.

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