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Job gains slow in June, but are probably still too hot to sway the Fed

Total nonfarm payroll employment rose by 209,000 jobs in June

The labor market is moderating gracefully, but conditions remain too hot for the Fed’s liking. Job gains were relatively solid yet again in June, with total nonfarm payroll employment reaching 209,000 jobs, compared to 339,000 in May, according to data released Friday by the Bureau of Labor Statistics

This increase is slightly under the average monthly gain of 341,000 jobs over the past 12 months.

The unemployment rate changed little at 3.6%, compared to 3.7% in May, with the total number of unemployed persons falling to 6 million. The unemployment rate has remained between 3.4% and 3.7% since March 2022.

“The incoming economic data has been filled with conflicting signals,” said Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni in a statement. “Manufacturing activity remains quite weak, while consumer spending has held up somewhat better, and new home construction and sales have picked up. Our forecast is for a slowdown in economic activity in the second half of 2023, with a recovery in early 2024. The June employment report reinforces that forecast.”

While job growth and wage growth are trending down, both are still well above the pace that would be consistent with the Federal Reserve’s inflation target, Fratantoni noted.

“We now expect that the FOMC will raise the federal funds target another 25 basis points at its July meeting.”

The lion’s share of the job growth in June came from gains in the government sector (+60,000 jobs), health care sector (up 41,000 jobs), the social assistance sector (up 24,000 jobs), and the construction sector (up 23,000 jobs).

Employment in the construction industry has increased by an average of 15,000 per month thus far this year, compared with an average of 22,000 per month in 2022. In June, employment in residential specialty trade contractors continued to trend up (+10,000).

Employment in the professional and business services sector and in the leisure and hospitality sector changed little in June.

“The construction industry is very interest-rate sensitive, so many expected job growth to crater. Yet, new-home construction has been supported by the lack of existing-home inventory,” said First American Deputy Chief Economist Odeta Kushi in a statement. 

“In the June jobs report, residential building construction employment is up 0.8% year over year, while non-residential is up by 4.8%. Residential building employment is up 11% compared with pre-pandemic, while non-residential building is up 1.8%. Both were up on a month-over-month basis. The fastest monthly growth came from residential specialty trade contractors. This sub-sector comprises establishments whose primary activity is performing specific activities, such as pouring concrete, site preparation, plumbing, painting and electrical work.”

With existing homeowners disincentivized to sell and few homes on the market, consumers may decide to renovate their own home instead of trading up with a new-home purchase, increasing demand for construction workers, economists said.

The number of residential building construction jobs came down from the recent peak in January of this year, but not by much, noted Kushi. 

“Residential construction is defying expectations and it’s because the housing market continues to face a housing shortage.”

June’s job report showed the lowest monthly job change since a decline in December 2020, according to Lisa Sturtevant, chief economist at Bright MLS

“The Federal Reserve has raised interest rates 10 times and it is possible that we are finally seeing the intended slowdown in the economy… Today’s employment report does not provide a clear indication as to what the Federal Reserve will do at its next meeting but the expectation is still for a rate increase when the Federal Open Market Committee convenes again. The modest slowdown in the labor market could give the Fed renewed confidence in its ability to bring the economy in for a soft landing.”

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