US labor markets remain tight as competition for talent is still high, evident by the increase in job openings within sectors such as healthcare & social assistance, finance & insurance and educational services. Employers are still facing ongoing challenges in filling vacancies as job openings remain high. Separations and quits both decreased MoM and increased YoY. Employers are holding on to workers as layoffs and discharges decreased both MoM and YoY. The unemployment rate returned to pre-pandemic levels, while the labor force participation rate slightly decreased, indicating that there are many Americans that are not a part of the US labor force, specifically 5.9 million, that would like a job, but are currently not looking. Americans are dealing with inflation as it impacts all facets of life including wages. Nominal wages are behind real wages as inflation has increased YoY by 8.5%, while real average hourly earnings decreased by 3.0% during the same period. As inflation rises, more people are seeking multiple income streams to pay bills including rent, food and gas. The percent of Americans who held multiple jobs as a percent of employed remained the same MoM, however it increased 4.3% YoY and is positively correlated with inflation. Mixed signals continue to plague the US economy as the labor market is relatively tight despite the decline in GDP for the second consecutive quarter. The Federal Reserve’s dual mandate of full employment and price stability will likely lead to additional interest rate hikes in attempts to reduce inflation.
Job openings remain elevated
Job openings decreased from 11.3 to 10.6 million this June, signaling a labor market that is still relatively tight. Although job openings declined by 5.4% MoM, they increased by 8.6% YoY. Since last month, the job openings to hires ratio declined from 1.7 to 1.6. There were 4.7 million more job openings than workers available, a decrease from the previous month of 5.3 million. Job openings were up in healthcare & social assistance (+79K), finance & insurance (+31K), and educational services (+22K), while the largest decreases were in retail trade (-343K), wholesale trade (-82K) and state and local government education (-62K).
The ratio of job openings to job seekers decreased by 4.7% MoM, however it increased by 74.5% YoY. The ratio reached its highest level since the BLS started reporting this data in December 2000, further evidence of a tight labor market.
The fill rate or the ratio of hires to job openings increased by 3.5% MoM, however it declined by 8.5% YoY. A fill rate greater than one indicates firms have hired more employees than open jobs while a fill rate less than one indicates the opposite, signaling inefficiencies in hiring which is a challenge many U.S. firms currently face. The fill rate for construction and arts, entertainment and recreation were above one for the month of June. The fill rate for financial activities declined by 22% MoM and 30.5% YoY, while the fill rate for trade, transportation and utilities increased by 24.9% MoM and 0.8% YoY.
Unemployment & labor force
The headline unemployment rate (U-3) decreased slightly from 3.6% to 3.5% over June to July, returning to pre-pandemic levels, while the labor force participation rate decreased from 62.2% to 62.1% over June to July. Alternative measures of labor utilization such as the (U-6) unemployment rate which captures the marginally attached (discouraged workers) and those that work part-time for economic reasons did not change from June to July; it remained the same at 6.7%. The employment to population ratio, which is the proportion of the country’s working age population that is employed, increased MoM by 0.2% and remains below pre-pandemic levels.
US labor markets continue to experience slack or inefficiencies in the economy. There are still 623,000 fewer civilians in the labor force and the labor force participation rate is 1.3% below pre-pandemic levels.
The vacancy rate, which is calculated as the non-farm job openings over the total labor force, has increased YoY by 14.5% in comparison to the unemployment rate, which has decreased by 40.7% YoY. Empirical evidence from a recently published paper by Blanchard et al. 2022, shows that high levels of vacancies have been followed by an increase in the unemployment rate since the 1950s, suggesting that as the vacancy rate starts to decline, there will be a rise in the unemployment rate. From a monthly perspective, the vacancy rate has remained the same at 7%, while the unemployment rate has declined by 2.8%.
The labor force participation rate for working age adults has increased by 0.6% YoY and 0.1% MoM. Among racial/ethnic groups, Black or African Americans experienced an increase of 2.4% YoY and a decline of 0.1% MoM in comparison to Hispanic or Latinos who experienced an increase of 0.8% YoY and a decline of 1.1% MoM.
Separations increase including quits and layoffs
Total separations – the summation of quits, layoffs/discharges and other separations – decreased by 1.4% from May to June, however increased by 2.4% YoY. Quits decreased by 0.9% MoM, however increased by 5.0% YoY. Quits were up in trade, transportation & utilities (+34K) and down in construction (-50K). Layoffs/discharges decreased MoM and YoY by 6.3% and 2.5%, respectively signaling that employers are holding onto employees given the ongoing hiring challenges.
The quit rate increased for information and trade, transportation and utilities MoM by 5.6% and 3.1% respectively, while the quit rate for construction decreased by 23.3% MoM. Quit rates increased for information and education and health services YoY, and declined for construction, trade, transportation and utilities, financial activities, and professional and business services YoY.
Gains in employment and average hourly earnings
The YoY growth in employment and average hourly earnings is considerably the highest for leisure & hospitality given summer travel demand. Leisure & hospitality and transportation & warehousing experienced large gains in employment YoY of 10.7% and 7.2% respectively, while utilities experienced no change YoY. In terms of wage growth, leisure & hospitality and education & health services experienced an 8.7% and 6.0% increase respectively, while other services experienced the smallest gain of 3.2% YoY. Wages remain below inflation as annual wage growth is 5.2% compared to annual inflation, which is at 8.5%.
Inflation continues to impact Americans in all facets of life
Gas prices have slowly come down, however the national average according to AAA is $4.01 as of August 10, 2022. Recent data from AAA and Kastle shows that there is a negative correlation between gas prices and office occupancy rates among 10 US metros. The highest office occupancy rates can be found in metros that are in states such as Texas, while high gas prices are in metros such as San Francisco or Los Angeles, which also experience the lowest office occupancy rates.
Inflation remains high
The Federal Reserve’s preferred measure of inflation, called the Personal Consumption Expenditure (PCE), increased by 6.8% YoY and 1.0% MoM. Economists also measure inflation using the Consumer Price Index (CPI), which increased by 8.5% YoY and 1.3% MoM. Despite the Federal Reserve’s tight monetary policy, inflation continues to be of concern for Americans. Employers are also facing rising costs as the BLS’s recent release of employment costs show that compensation costs for private industry workers increased by 5.5% YoY, and unit labor costs for the nonfarm business sector increased by 10.8% in the second quarter of 2022. Americans are also experiencing the impact of inflation as real disposable personal income declined MoM and YoY by 0.3% and 3.2% respectively, despite the MoM and YoY increase in nominal personal disposable income.
The percent of Americans who held multiple jobs as a percent of employed remained the same MoM, however it increased 4.3% YoY and is positively correlated with inflation. As inflation rises, more people are seeking multiple income streams to pay bills including rent, food and gas. Household debt rose by 2% or $312 billion from 2022Q1 to 2022Q2 to $15.15 billion, with credit card balances accounting for a 13% YoY increase, which is the largest increase in more than 20 years according to the Federal Reserve Bank of New York.
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The cruise industry continues to be impacted by not only labor shortages and supply chain issues, but now inflation. Older, retired Americans tend to be the primary demographic that the cruise industry targets, however as prices continue to rise, potential customers are looking for cheaper leisure activities such as theme parks and amusement parks.
Economic growth declined in the second quarter
US GDP declined by 0.9% at an annual rate over 2022Q2, the second consecutive quarter of a decline in GDP. Among the four primary components of GDP, investment declined by 2.73%, followed by a decline in government spending of 0.33%, while consumer spending increased by 0.7% and net exports increased by 1.43%. Although consumer spending was slightly up this past quarter, consumers shifted their spending from goods to services, while home and business construction declined by 0.71% and 0.32%, respectively. As the Federal Reserve continues to increase interest rates, it is becoming more difficult for Americans to buy homes, weakening the housing market. The National Association of Homebuilders reported that the Housing Market Index (HMI), which gauges builders’ perceptions of the housing market, dropped by 18% MoM and 31% YoY.
Mixed signals continue to plague the US economy
Although GDP has declined for the second consecutive quarter and inflation remains high, the Federal Reserve’s dual mandate of full employment and price stability has led it to increase interest rates in attempts to reduce aggregate demand, which will result in lower prices and a slight increase in the unemployment rate. The labor market is still relatively tight with a high number of job openings and record low layoff rates. During the Dot Com Recession and the Great Recession, the peak layoff rates reached 1.8% and 2.0% respectively in comparison to the 0.9% reported this past June. Alternatively, the 10-2-year treasury yield spread which is the two-year difference between the 10-year and 2-year treasury bonds has historically been negative prior to a recession. Currently, the 10-2-year treasury yield spread is on a downward trajectory indicating a possibility for a recession in 2023.
Business leaders express their outlook on the economy
The Wall Street Journal recently asked C-suite leaders across multiple industries about their views regarding the economy, consumer spending and supply chains. Concerns about inflation and the supply chain have led many businesses to reduce discretionary spending. Business leaders across retail, technology, consumer goods, auto, financial services, oil and security & defense continue to monitor the macroeconomy as uncertainty seems to resonate with all C-suite respondents.
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