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Weekly Economic Commentary

Nonfarm employment: Unchartered territory

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Today’s nonfarm employment number is at odds with what other numbers are showing regarding the health of the US economy. However, the number of jobs has ‘consistently’ been at odds with the US economy during the whole year. Although GDP numbers for the first and second quarters indicated the US economy was in bad shape, employment numbers told a completely different story. Employment growth was very strong in the first half of the year, increasing by more than 2.7 million jobs or 461,000 average job growth per month, which is not consistent with a poorly performing economy.

Thus, from this point of view, July’s nonfarm payroll employment increase of 528,000 is not out of line with what has already happened during the first half of the year, it is just a continuation of this new post-Covid environment. And there are no good historical comparisons to what is happening today in terms of economic numbers. When the Spanish flu hit the US and world economy back in the second decade of the 1900s economic data as we know it today was nonexistent and thus it is very difficult to make historical comparisons.

Thus, these are also unchartered times for the Fed (Federal Reserve) as it tries to make sense of what is happening in the US economy. The only thing that is clear for the Fed is that inflation is too high, and it needs to bring it down. However, they need to be clearheaded and figure out the best solution to the problem. Is it employment growth that is keeping inflation higher? Although average hourly earnings were higher than expected in July, up 5.2% on a year earlier basis, real disposable personal incomes have been declining for several months so the Fed should take notice that while the labor market is very strong, real incomes are already coming down and not contributing to higher inflation.

However, as we argued in our Weekly last week, targeting employment growth at this time is not a good strategy for the Fed, especially because GDP numbers are already showing a struggling economy even if those numbers have also been at odds with the growth in employment during the first half of the year. Thus, the Fed knows that the economy is slowing down and that it is a matter of time for inflation to start coming down. However, we should not expect inflation to come down very quickly and thus the Fed needs to be responsive.

The biggest issue today is one of a ‘readjusting’ economy, an economy that relied too much on the goods sector during the pandemic and has been transitioning into a more ‘normal’ economy, one that depends more on the service sector for economic growth. Thus, the strong growth in service sector employment is not a reason to fret about potential upward pressure on inflation going forward. That is, from this point of view, a slowing economy that is contributing to a slowdown in inflation is not inconsistent with a strong job market and the Fed should be able to keep its cool when considering its upcoming interest rate increases.

We acknowledge that markets are already pricing in a 75 basis point (bp) increase in the federal funds rate for September. However, markets originally priced a 100 bp increase for July that never happened. There is still plenty of time ahead of the September meeting and plenty of economic data scheduled to be released. Thus, as it stands today, we still believe that the Fed will increase the federal funds rate by 50 bps in September and then by another 50 bps in December.


Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

Industrial production: Industrial and production engineering is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

FHFA house price index is a quarterly index that measures average changes in housing prices based on sales or refinancing's of single-family homes whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac.

Consumer confidence index is an economic indicator published by various organizations in several countries. In simple terms, increased consumer confidence indicates economic growth in which consumers are spending money, indicating higher consumption.

ISM Manufacturing indexes are economic indicators derived from monthly surveys of private sector companies.

ISM Services Index is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives.

Non-Manufacturing Business Activity Index is a seasonally adjusted index released by the Institute for Supply Management measuring business activity and conditions in the United States service economy as part of the Non-Manufacturing ISM Report on Business.

New orders index measures the value of the orders received in the course of the month by French companies with over 20 employees in the manufacturing industries working on orders.

Source: FactSet, data as of 6/3/2022

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