June jobs take-away indicates no recession yet

Despite the hand-wringing over a coming recession and sentiment levels dropping to all-time lows, the June employment report showed that the U.S. economy is alive and well.

There were 372,000 new positions added and the unemployment rate remained at 3.6%, a tenth of a percentage point above 50-year lows that were reached in February 2020, before the wrath of the pandemic infected the jobs market.

Adding to the 6.7 million jobs created in 2021, total employment gains for the first half of 2022 are strong. In fact, the 2.74 million jobs for the six months from January through June is more than 20% ahead of the average gains for an entire year during the 2010s, according to Diane Swonk, chief economist at Grant Thornton accounting network.

Despite the June progress, it appears that job creation is beginning to taper, as the labor market makes a transition from the COVID-19 recovery era into a more historically normal one.

After adding an average of more than a half a million jobs a month in the first quarter of 2022, job creation averaged just over 380,000 in the second quarter and is likely to continue to downshift in the second half of the year.

Adding to the uncertainty, labor market progress varies dramatically from sector to sector.

For example, leisure and hospitality added 67,000 jobs in June, but the industry still has 1.3 million fewer jobs than before the pandemic hit the United States in February 2020.

At the other end of the spectrum, professional and business services increased by 74,000 during the month, improving its job tally to a rousing 880,000 since February 2020.

In the middling category, employment in manufacturing increased by 29,000 in June, meaning that after two years and four months, it has finally returned to its pre-COVID level of employment.

But further COVID-19 labor market dislocations have persisted.

There are still 5.9 million people counted as unemployed, despite job openings remaining at a robust 11.3 million. That means that there were 1.9 openings per every available worker at the end of May — near record levels. And with inflation at four-decade highs and average hourly earnings rising by 5.1% annually, many Americans are falling behind.

To bridge the gap, some are dipping into pandemic savings.

Swonk estimates that "consumers have drained about $600 billion of the excess $2.5 trillion in savings they amassed during the pandemic to deal with the bite of higher prices." The loss in savings is disproportionate for low-income households, who were able to bolster savings during the pandemic for the first time in decades because of stimulus relief and enhanced child tax credits.

Even with early indications that the labor market and the economy are starting to slow, the June data keep the Federal Reserve on track to raise interest rates by another 0.75% at its next meeting, on July 27.

The central bank has said that it is willing to tolerate higher unemployment to fight inflation, and officials are likely to view an economy that can create 372,000 jobs as one that can absorb higher interest rates.

After the upcoming meeting, the Fed will have two months of information to distill before the Sept. 20-21 confab. During that period, if the economy and price increases slow, the Fed may not need to be as aggressive with its policy.

But if inflation remains stubbornly high, the Fed has promised that it would continue to hike interest rates at whatever pace it deems necessary. Of course, the fact that Fed policy remains aggressive may tip the economy into recession, but  the evidence is not yet indicating that outcome. Stay tuned!