U.S. Labor Market Weakens: Unemployment Rate Rises to 4.1%

The U.S. labor market shows signs of weakening as the unemployment rate rises to 4.1%. While U.S. employment experienced solid growth in June, hiring in the government and healthcare sectors constituted approximately three-quarters of the total payroll increase. The unemployment rate has climbed to a two-and-a-half-year high, indicating a weakening labor market that may prompt the Federal Reserve to consider reducing interest rates soon.

Unemployment Rate Hits 4.1%

The Labor Department's closely monitored employment report, released on Friday, revealed that the economy created 111,000 fewer jobs in April and May than previously estimated. This suggests a deceleration in the trend of payroll growth.

Annual wage increases have slowed to their lowest pace in three years amid an expanding labor pool, further highlighting the labor market's warning signals. Approximately 277,000 individuals joined the labor force, contributing to the rise in the unemployment rate from 4.0% in May to the highest level since November 2021.

In conjunction with the moderation in prices observed in May, the report may bolster the Federal Reserve's confidence in the inflation outlook following a disruption in the disinflationary trend during the first quarter. Financial markets anticipate that the U.S. central bank, which aggressively tightened monetary policy in 2022 and 2023, will begin easing in September.

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Scott Anderson, Chief U.S. Economist at BMO Capital Markets, stated, "We now have definitive evidence of labor market cooling with a somewhat alarming rise in the unemployment rate in recent months. This should give policymakers more confidence that consumer inflation will soon return to the 2.0% target on a sustainable basis."

Nonfarm payrolls increased by 206,000 jobs in June, primarily driven by government hiring, according to the Bureau of Labor Statistics. Economists surveyed by Reuters had forecast a payroll increase of 190,000 jobs, with the unemployment rate remaining unchanged at 4.0%.

Job growth has averaged approximately 222,000 per month in the first half of this year. Analysts estimate that the economy needs to create between 180,000 and 200,000 jobs per month to accommodate the growth in the working-age population, factoring in a recent surge in immigration.

A lagging employment measure, the Quarterly Census of Employment and Wages (QCEW), has indicated a much slower pace of job growth through the fourth quarter of 2023 compared to payroll data. The QCEW data is derived from employer reports to state unemployment insurance programs. While economists expect employment to be revised downward when the Bureau of Labor Statistics publishes its payrolls benchmark estimate in August for the 12 months through March of this year, they argue that the QCEW data does not account for unauthorized immigrants, a group believed to have contributed to strong job growth last year.

Although hiring in June was driven by acyclical sectors such as healthcare and state and local governments, the proportion of industries reporting job growth increased to 59.6% from 56.4% in May. Government employment surged by 70,000 jobs, the highest since December, boosted by local government (excluding education) and state government hiring. Private payrolls increased by 136,000, with the healthcare and social assistance sector adding 82,400 positions. Construction payrolls rose by 27,000, while the retail sector and manufacturing experienced job losses. Employment in professional and business services declined by 17,000 jobs, with temporary help jobs dropping by about 49,000, the most significant decline since April 2020. This likely portends slower payroll gains ahead.

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Jeffrey Roach, Chief Economist at LPL Financial, noted, "So far, we don't see apocalyptic signs within the labor market, but investors should be wary when the labor market is supported by government payrolls. The downward revisions to the previous two months are consistent with an economic slowdown."

Wage Growth Slows Amid Rising Unemployment Rate

The 525 basis points worth of rate hikes from the Federal Reserve since 2022, along with the depletion of excess savings accumulated during the COVID-19 pandemic, are eroding demand. Traders of federal funds futures saw a roughly 77% probability of a rate cut at the Federal Reserve's September 17-18 meeting, according to the CME Group's FedWatch tool. Traders are also pricing in a rising chance of a second rate cut in December.

The Federal Reserve has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range since last July. The minutes of the central bank's June 11-12 meeting, published on Wednesday, showed policymakers acknowledged that the economy appeared to be slowing and that "price pressures were diminishing."

Average hourly earnings rose by 0.3% in June, following a 0.4% increase in May. Over the 12 months through June, wages increased by 3.9%, the smallest gain since June 2021, after a 4.1% rise in May. Wage growth in the 3%-3.5% range is considered consistent with the Federal Reserve's 2% inflation target.

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Despite its underlying softer details, the employment report was consistent with continued economic expansion. Nevertheless, the second consecutive monthly increase in the unemployment rate could signal a rise in joblessness. The household survey, from which the jobless rate is derived, showed employment rebounding by 116,000 in June, insufficient to match the supply. The unemployment rate has increased by six-tenths of a percentage point from a low of 3.5% last July. The household survey has shown minimal job growth compared to nonfarm payrolls.

Preston Caldwell, Chief U.S. Economist at Morningstar, observed, "We have very good reason to think that the household survey is underestimating immigration, contributing to the underperformance versus payrolls." The number of individuals experiencing long-term unemployment increased by 166,000 to 1.516 million in June, though fewer people reported working part-time for economic reasons.

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The labor force participation rate, representing the proportion of working-age Americans who have a job or are seeking one, rose to 62.6% from 62.5% in May. The participation rate for prime-age workers, those aged 25 to 54, increased to 83.7%, the highest level since February 2002, up from 83.6% in May.

Nick Bunker, Economic Research Director for North America at Indeed Hiring Lab, concluded, "The labor market is chugging along for now, but evidence is mounting that if it continues to slow down, it could stall."

News Source:- reuters.com