Market Week: July 10, 2023

The week in review

  • ISM Mfg./Services PMI: 46.0/53.9
  • Nonfarmpayrolls increased 209,000

The week ahead

  • CPI
  • Consumer sentiment

Thought of the week

The U.S. economy has proven to bemore resilient in 1H23 thanmany expected, as strength in the labormarket has helped support consumption. But howmuchmomentum does that labormarket have? This week’s chart looks to quantify labormarketmomentumin one number by analyzing seven key indicators: private payrolls, average hourly earnings, the US Composite PMI Employment Index, the Conference Board Labor Differential Index, initial jobless
claims, job openings and the unemployment rate. While the labormarket remains a bright spot despite higher interest rates, it seems that his part of the economy is beginning to come off the boil.

Last week’s data confirmed that, while still tight by historical standards, the labormarket is beginning to cool. After surging lastmonth, JOLTS job openings fell to 9.8M, bringing the ratio of openings to unemployed workers to 1.6, its lowest level since October 2021. In contrast to this weakening signal, the quits-to-layoffs ratio rose to 2.58 on the back of rising quits. While still elevated, this is 23% below last year’s peak. Elsewhere, nonfarmpayrolls rose by 209K in June, falling short of expectations and slowing compared to May. The details were a bitmixed; a tick down in the unemployment rate to 3.6% and tick up in wage growth to 4.4% highlighted continued strength, but amaterial downward revision to job growth in April and May, and the slowest pace of private employment gains since 2020, confirmed that momentumis fading.

Looking ahead, the labormarket should continue to normalize, and payroll growth shouldmoderate as labor demand cools. While this week’s data did little to change expectations for the July FOMCmeeting, an increasingly balanced labormarket implies slower wage growth, which should allow inflation to keep drifting lower and reduce pressure on the Fed tomaintain its hawkish messaging.

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