Weekly Market Perspectives: Labor market cooling supports soft landing narrative

Published: July 8, 2024

In a holiday-shortened week, labor market updates were the primary focus for investors and economists. Reports from ADP, the Bureau of Labor Statistics, and the US Department of Labor presented a view that the labor market is resilient but slowing. Without an immediate threat of widespread layoffs, investors viewed the reports as largely positive and priced in an earlier interest rate cut from the Fed. Following the labor prints, equity markets moved to new all-time highs as long-term yields moved lower. The S&P 500 Index rose 2.0% for the week, pushing the year-to-date return up 17.6%. Fixed income, as measured by the US Aggregate Bond Index, moved higher by 0.7% as yields fell across the curve, bringing the 2024 return to unchanged.

Labor data released Wednesday added further evidence of a slowing labor market. According to ADP payroll data, US companies hired fewer workers in June (150k vs 165k expected), while wage growth slowed to 4.9%, the lowest annual increase since August 2021. If not for a rebound in seasonal hospitality and leisure segments, the ADP headline figure would have been closer to 85k new jobs added, reflecting a significant slowdown in core industries. There are also scattered signs that companies are paring headcount due to margin pressures and softer economic conditions.

Continuing Jobless Claims Rise for Ninth Consecutive Week—Longest Since 2018
US Continuing Jobless Claims (Thousands)

Source: US Labor Department, Bloomberg.

In a separate report from the US Labor Department on Wednesday, recurring unemployment claims increased for a ninth straight week, marking the longest stretch since 2018. This trend indicates a growing number of workers are having difficulty finding a new job. Corroborating data published from the Institute of Supply Management (ISM) showed that the US services sector—the largest segment of US employment—contracted last month at the fastest pace in four years in another sign that the economy is losing steam. While labor strength has been a key pillar of the post-COVID economy, there are pockets of weakness that deserve attention.

Job Market Cools with Unemployment Higher in 2Q
Change in nonfarm payrolls (MoM) vs Unemployment Rate

Source: Bureau of Labor Statistics, Bloomberg.

Finally, on Friday, the Bureau of Labor Statistics reported the economy added 206k jobs in June, better than the 190k expected by economists. However, the report showed May’s labor figures were revised lower to 218k from the initially reported 272k, bringing total revisions for April and May 111k lower than first reported. Social/healthcare sectors added 82k jobs and government increased by 70k, while several categories saw employment shrink including manufacturing, retail, and professional services. Included in the report, the unemployment rate increased to 4.1%, up from 4.0% the prior month, reaching its highest level since November 2021 in another sign that the job market continues to cool.

– Written by Eric Schmitz, CFA