But Boosts Inflation Concerns

• US job growth was stronger than expected at 372,000 in June.
• The unemployment rate held steady at a very low 3.6% over the month. There was a small decline in the labor force participation rate.
• Average hourly earnings rose a solid 0.3% in June, although wage growth is slowing somewhat.
• Job growth will slow through the rest of 2022 and in 2023 as the Fed tightens monetary policy.
• PNC’s baseline outlook is for continued economic expansion over the next few years. The probability of recession is low in 2022 but is elevated in 2023 and 2024.

The US economy added 372,000 jobs in June, about 100,000 above the consensus expectation, according to a survey of employers from the Bureau of Labor Statistics. The unemployment rate held steady at 3.6% for the fourth straight month, just 0.1 percentage point above its pre-pandemic level, and near the lowest unemployment rate in more than 5 decades.

There were small downward revisions to job growth in May, to 384,000 from 390,000, and in April, to 368,000, from 436,000. Over the past three months, job growth has averaged 375,000. Although this is below the pace of better than 500,000 per month in the first three months of 2022, it is well above the pace of around 200,000 per month before the pandemic came to the US.

Employment in June was about 500,000, or 0.3%, its pre-pandemic peak in February 2020. Employment should reach a new peak in the next few months, a remarkable achievement given that the economy lost 22 million jobs (a drop of 14%) in March and April of 2020.

The private sector added 381,000 jobs in June, while government employment fell by 9,000.

Employment in a survey of households (different from the survey of employers) rose by 156,000 in June. The labor force (number of people either working or looking for work) fell by 353,000 over the month. The labor force participation rate-the share of adults working or looking for work-fell to 62.2% in June from 62.3% in May. The labor force participation rate has been between 62.2% and 62.4% throughout 2022. While this is much higher than the 60.2% rate in April 2020, as the pandemic was ravaging the US labor market, it is well below the 63+% rate in early 2020, right before the pandemic. The labor force is structurally tighter now than it was before the pandemic, and that does not appear to be changing.

Private goods-producing industries added 48,000 jobs in June, with solid gains of 29,000 in manufacturing and 13,000 in construction. Private service-providing industries added 333,000 jobs over the month, including increases of 96,000 in education/health services and 74,000 in professional/business services. Employment in leisure/hospitality services notched a gain of 67,000, but employment in the industry is still down by 1.3 million, or 8%, from its pre-pandemic level. Retail trade employment increased by 15,000 in June, after average job losses of more than 20,000 in the previous three months.

Average hourly earnings rose 0.3% in June, close to the pace of the previous two months. On a year-ago basis, average hourly earnings were up 5.1% in June from one year earlier, a slowing from growth of 5.3% in May and 5.6% in March. Wage growth, while still quite good, is slowing from its very strong pace in late 2021/early 2022. The average workweek held steady at 34.5 hours in June from May. With more jobs, a higher average wage, and an unchanged workweek, aggregate earnings rose a strong 0.6% in June, although this was likely below the pace of inflation.

The June jobs report was very strong, even stronger than expected. Job growth was well above the consensus expectation, the unemployment rate held just above a decades-long low, and wage growth was solid. This very strong job growth clearly demonstrates that the US economy is not anywhere close to recession in mid-2022.

But from the Federal Reserve’s perspective, the strong jobs report is worrisome. The Fed would like to see job growth cool to a more sustainable pace. Gains of around 400,000 per month are well above the number of new entrants to the labor force, and thus the labor market continues to tighten.

Although wage growth has slowed somewhat in recent months, Fed officials are concerned that the tight labor market is putting upward pressure on wages and inflation. With inflation running well above the central bank’s 2% objective, the Fed is raising interest rates in an effort to slow economic and job growth and bring inflation lower. The strong June jobs report is further support for a 75 basis point increase in the federal funds rate at the Federal Open Market Committee’s meeting in late July.

Higher interest rates are starting to weigh on the US economy, most notably through a slowing in the housing market. Slower economic growth will translate into weaker job growth by the end of 2022, to around 150,000 per month, and then to below 100,000 per month in 2023. The unemployment rate will increase slightly but should run at around 4% next year.

PNC’s baseline outlook is for no recession over the next couple of years. Recession risks are low in 2022 given the current strong labor market, which will support consumer spending. But recession risks are elevated for 2023 and 2024 as the Fed tightens monetary policy; higher interest rates to slow inflation could cause the economy to contract. The probability of recession over the next couple of years is around 40%, about double what it was prior to the Russian invasion of Ukraine.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.