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‘Not Giving Up’: Job Data Show Just How Tight US Labor Really Is

Nearly 400,000 jobs added in a month and an unemployment rate near a 50-year low is probably enough evidence of the extreme tightness in the US labor market. But a look beneath the surface of the June employment report, and other recent data, shows just how hot it really is.

A more inclusive measure of joblessness hit a record low last month, while wages for workers who aren’t in management roles kept rising, the Labor Department’s report showed. Job openings also remain close to all-time highs, and a near-record number of small businesses raised compensation in June.

Combine that with what’s expected to be another fiery inflation print -- consumer prices in June are forecast to set a fresh four-decade high when released next week -- and it’s full steam ahead for the Federal Reserve. Economists and traders broadly expect the central bank to raise interest rates by another 75 basis points this month to rein in demand across the economy, and several Fed officials have already endorsed such a move.

“After this report, you can pretty much count on 75 basis points in July,” said Jim Caron, chief fixed income strategist with Morgan Stanley Investment Management. “The job market is strong and it’s not giving up any growth.”

Record-Low Underemployment

The U-6 unemployment rate, a broader measure that includes discouraged and underemployed workers, fell in June to its lowest level in data back to 1994, suggesting that layoffs and dismissals remain rare. Employers have been struggling for months to hire qualified workers -- and retain the ones they already have -- as demand for labor outstrips supply.

The low level of unemployment implies that the pool of workers searching for a job remains narrow, which is likely keeping job openings elevated. That dynamic could wane later this year as the Fed keeps raising interest rates, which is meant to curb consumer appetite and, subsequently, demand for workers.

“The number of people who were not actively looking for work but said that they wanted a job inched to the lowest reading since the pandemic began, underscoring the likelihood that there is no longer a large stable of potential workers sitting on the sidelines waiting to return,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note.

Nonsupervisory Wages

While on the surface wage growth appeared to cool slightly, average hourly earnings for production and nonsupervisory workers surged yet again in June. Wages among that group jumped by 0.5% for a second-straight month and climbed 6.4% from a year earlier, underscoring how businesses are increasing pay to attract and retain applicants.

“This implies continued flattening in the income distribution, with more dollars going to consumers with higher propensity to spend, thus making it harder for the Fed to reduce demand,” said Aneta Markowska, chief economist at Jefferies LLC. 

Earlier this week, a survey of small businesses showed a near-record 48% of respondents raised compensation in June. Some 28% say they intend to increase pay in the coming three months, a pickup from May, according to data from the National Federation of Independent Business.

Help Wanted

Even with wages rising by some measures, many still aren’t interested in working. The number of people not in the labor force jumped in June by the most since September 2020. The more widely followed participation rate, which measures the share of the population that is working or looking for work, unexpectedly dropped, led by so-called prime age workers who are 25 to 54 years old.

That’s keeping millions of positions unfilled. Data earlier this week from a separate Labor Department report showed US job openings dipped slightly in May but remained near a record at 11.3 million. That translates to 1.9 jobs for every unemployed person that month, a measure of labor market tightness touted by Fed Chair Jerome Powell, who has said the economy can withstand aggressive rate hikes without toppling into recession.

The Survey Says...

Recent survey data also capture painstaking efforts to bring new employees aboard. The Institute for Supply Management’s employment indexes in both the manufacturing and services industries dropped in June to their lowest levels since the early months of the pandemic recovery.

While a decline below the 50 level is typically associated with a weaker labor market, survey respondents say they’re simply unable to find the workers they need.

That corroborates results from the NFIB survey which showed that 23% of small-business owners said labor quality was their top business problem, second only to inflation.

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