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Thoughts from Last Week
In an environment dominated by fears of recession or runaway inflation, the May Jobs report offers investors some comfort that the economy can find a soft-landing path to avoid both. Businesses added a solid 390K non-farm jobs in May, thanks in part to a tick higher in labor force participation and labor supply flexibility. The unemployment rate also stayed at 3.6% for the third consecutive month, signaling that the labor market is at least tightening more slowly.
Notably, the labor force seems to be adjusting to a more normal economy as it adds jobs where most needed—construction, leisure and hospitality, and education— and sheds jobs where less needed—retail employment, as consumers switch spending from goods to services. The demand side of the labor equation is still running hot but shows its first signs of moderation, with JOLTS job openings falling from its record peak of 11.9K to 11.4K in April. Anecdotally, companies also seem to be positioning to reduce hiring efforts, with mentions of “layoffs” ticking higher in 1Q22 earnings call transcripts. However, economic data continue to show record high hiring efforts and record low layoffs pointing to a very tight labor market, with Challenger data showing companies announced 20.7K layoffs compared to 612.7K hiring announcements in May.
Over the next few months, we expect job gains will continue to moderate as the pace of decline in unemployment reaches a floor slightly below its current 3.6% level. However, the Fed would welcome a cooling off in the labor market and, combined with a moderation in wage growth, such data may suggest that the economy can find its footing on a path of slow and steady growth with low inflation, so long as the Fed has the patience to allow it.