Can We Get a Goldilocks Scenario?

Can We Get a Goldilocks Scenario?

July 14, 2022
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Broad-Based Job Gains Keep Recession Away

The U.S. added 372,000 jobs in June, at just a slightly lower clip from May, while the unemployment rate remained unchanged at 3.6%. The participation rate dipped to 62.2% in June as individuals dropped out of the labor force.

In contrast to what some pundits are suggesting, the economy is not currently in recession. The job market is too hot for that scenario – at least for now. We expect the labor market to expand throughout the next several months but at a slower pace as firms still struggle with finding suitable workers. Firms will still likely be increasing wages as they deal with a shortage of qualified workers and elevated quit rates. The National Federation of Independent Business reports that 60% of firms have few or zero qualified applicants for current job openings so this could turn into a long-term problem with the U.S. workforce.

Now for the good news. Job gains were broad-based in June. Every major sector added jobs except Government. Business Services, Education and Health Care along with Leisure and Hospitality sectors all experienced outsized gains in employment.

That Goldilocks Scenario

The ideal scenario for policy makers would be a slow deceleration in job gains as the economy progresses throughout this year. As shown in the LPL Chart of the Day, the 3-month average change in job growth slowed to 375,000 in June. “The trajectory for job growth really can’t get much better than this,” says LPL Financial Chief Economist Jeffrey Roach. This could be the perfect scenario for the Federal Reserve (Fed). A measured cool-down in job growth and a slight uptick in unemployment could be the antidote for treating the extremely tight labor market.

View enlarged chart.

One Nagging Problem Are Those Still Out of the Labor Force

The high number of people not returning to the work force is one of the nagging problems with the labor market right now. Relative to pre-pandemic levels, the economy has 4.8 million more people out of the labor force. Some likely took early retirements but that does not explain all of the story. If individuals do not reenter, the labor market could remain tight. However, as inflation pressures linger, we think that some individuals will eventually return to work.

View enlarged chart.

Federal Reserve Likely to Continue on Projected Tightening Path

Job gains in June were broad based and with another good labor report, the Federal Open Market Committee (FOMC) can emphasize the imbalances to price stability over supporting labor markets. Inflation is the paramount concern for committee members and a tightening labor market adds fuel to the fire. As job gains moderate and more people come into the work force, we could see the unemployment rate increase, removing some of the tightness of the labor market. Unless economic data deteriorate quickly, the FOMC will likely increase rates again in July by 75 basis points (0.75%).

For more on the current environment, be sure to watch our latest Econ Market Minute, where LPL Financial Chief Economist Jeffrey Roach discusses more about the current state of affairs.

 

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