NFP Review – Still Hot

Summary

• Despite the negative surprise, NFP data continues to show a strong labour market.
• A detailed analysis of indicators such as hours worked or temporary employment show that labour demand is not slowing much.
• A high and rising EPOP shows labour market pressures are not easing.

Market Implications

• Friday’s release is unlikely to sway the Fed from its planned two additional hikes.

Labour Demand Remains Above Trend

For the first time since April 2022, consensus expectations at 230,000 were above actual NFP at 209,000. In addition, the two months’ net revisions were -100,000.

Nevertheless, while June employment growth continued to slow, it remained well above pre-pandemic levels. Payroll and household survey employment growth were 2.4% and 2.3% respectively (Chart 1), nearly twice as fast as pre-pandemic. (As explained here, payroll employment measures economy-wide employment, while household survey measures the employment status of the working-age population).

The employment share of temporary services fell to below pre-pandemic levels, which has previously signalled labour market weakness (Chart 2). This time, however, given other macro indicators suggest economic strength, lower reliance on part-time work is likely to reflect a long-term change in employers preferences.

For instance, employers may have decided to decrease their reliance on temporary work because it proved difficult and expensive to secure during the pandemic.   

Changed employer preferences are also shown by a post-pandemic increase in full-time employment, which sharply contrasts the secular decreases of the past decades (Chart 2).   

This could reflect an improvement in the relative bargaining power of workers, due to demographics as well as changes in workers’ work/life balance preferences. As a result, employers now offer better work conditions, including more full-time employment and therefore less reliance on temporary services.

Also, I do not think the decrease in average hours worked to below pre-pandemic levels reflects labour demand weaknesses (Chart 3). This is because production and non-supervisory workers’ hours, while falling, remain well above pre-pandemic levels. The increase during the pandemic, unlike decreases during typical recessions, reflected labour shortages.

Since the pandemic, average hours worked have been dragged down by a sharp decline in other (i.e., non production and supervisory) workers’ hours. Also, the share of other workers in total employment remains well above pre-pandemic levels, possibly because employers have struggled to hire back lower-paid production and non-supervisory workers. 

This suggests a surplus in other workers, which could explain the decline in their hours worked. 

The bottom line is that the decline in hours is likely to reflect structural rather than cyclical changes in the demand for labour.

Labour Supply Remains Below Labour Demand

Unlike labour demand growth near 2.5% YoY, labour supply (i.e., the labour force) growth was 1.8% YoY (Chart 4). On average over the past 12 months, labour supply has increased by 1.6%, above the pre-pandemic 1%. The recent acceleration reflects largely a recovery in the foreign-born workforce.

Labour Market Remains Tight

Indicators of labour market tightness were mixed (Chart 5). On the one hand, the average unemployment rate fell by 10bp, and the prime age employment to population ratio increased by 20bp. On the other hand, the gap between black and white unemployment rates widened by 60bp, and unvoluntary part-time employment increased by 30bp relative to the workforce.

However, the employment to population ratio (EPOP) tends to be a more reliable indicator than unemployment rates. On balance, therefore, today’s data is more likely to indicate a tighter than looser labour market.

Real Wage Growth Accelerated Further

Average hourly earnings increased by 0.4% MoM against 0.3% expected and in May (Chart 6).  If the consensus forecast for June headline CPI at 3.1% YoY is correct, today’s wage gains will translate into a real YoY increase of 1.3%, up from 0.3% in May. If so, the increase in real wages would approach the post-GFC highs (Chart 6).

Market Consequences

Ahead of NFP, markets had sold off on the strong ADP and claims data. Yet the equity market’s reaction to the NFP miss was underwhelming. The SPX ended the day 30bp below Thursday’s close. 

At the same time, the curve steepened with 2yr yields falling 3bp and 10yr yields rising 4bps.  The December 2023 and June 2024 FFR fell by 2bp and 3bp, respectively.

Market reaction could partly reflect a worsening of growth expectations offset only in part by lower FFR expectations.

I think the market is reading too much into the NFP. If one ignores the surprise (consensus must be right once in a while), the data paints a picture that is broadly unchanged from the past 12 months or so. That is, labour demand is cooling but too slowly to alleviate labour market pressures.

On the other hand, I agree with the market that Friday’s data will have little impact on the Fed. The Fed tends to respond to a build-up of evidence rather than to single data points. In addition, the data did not clearly support the doves more than the hawks.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)