MANHATTAN (CN) — Disparate job reports this week caused investors to cautiously retreat from last week’s rally, as Wall Street worries the Federal Reserve may resume its process of hiking rates later this month.
Failing to compound last week’s gains, all three equities dropped earlier in the week, though they reclaimed some ground on Friday. By the week’s closing, the Dow Jones Industrial Average declined 642 points, while the S&P 500 and Nasdaq fell 51 points and 127 points, respectively.
On Friday, the Bureau of Labor Statistics’ monthly jobs report showed that nonfarm employment increased by 209,000 last month, slightly less than expected and the smallest monthly jobs gain since late 2020. Wage growth continued its upwards path, gaining 0.4% last month and unemployment sits once against at 3.6%.
Among individual sectors, healthcare and government saw the biggest increases, of 65,000 and 60,000 jobs, respectively. Retail lost just over 11,000 jobs, and temporary employment also fell by 12,000 jobs.
The numbers were disappointing, especially compared with another employment report earlier in the week. Worse still, the payroll numbers for May and April were revised downward by 110,000 jobs.
“As far as broader economic growth is concerned, the jobs report suggests real GDP is slowing, but not by enough to cool wage growth yet,” said Bill Adams, chief economist at Comerica Bank. “The Fed will see the jobs report as affirming the case for a rate hike later this month, and policymakers will probably say that additional hikes will be appropriate if inflationary pressures stay high.”
Experts say the data show a labor market near full at capacity, though many believe it will not be enough to dissuade the Fed from further rate hikes since it conflicts with a payroll report released on Wednesday by ADP, which showed 497,000 private sector jobs were added to the U.S. economy in June. Small- and mid-sized companies were the beneficiaries of the job growth, more than half of which seen in the leisure and hospitality sector. Companies with more than 500 employees lost 8,000 jobs.
“Consumer-facing service industries had a strong June, aligning to push job creation higher than expected,” Nela Richardson, ADP’s chief economist, said in a statement. “But wage growth continues to ebb in these same industries, and hiring likely is cresting after a late-cycle surge.”
This is not the first time the two jobs reports have diverged, though in this case the gap is wider than it has been recently, with the Bureau of Labor Statistics report showing declining employment in financial services and business services where no such decline was in the ADP report.
Peter Boockvar, chief investment officer at Bleakley Financial Group, said the ADP and labor reports often diverge and “on any given month they can tell two different stories,” but that over the year, the data should converge to tell a coherent tale, pointing to ADP’s year-to-date average of 263,000 jobs per month and the Bureau of Labor Statistic’s monthly average of 278,000 jobs.
He said that temporary jobs are now being lost more consistently, “which says something about full-time hiring intentions,” but that the labor market will likely be propped up by federally subsidized factories and other infrastructure jobs.
The other jobs data this week from the Department of Labor's Job Openings and Labor Turnover Survey, showed the quits rate increasing by 0.2% in May and the ratio of job openings per unemployed — a metric many believe the Fed watches closely — also falling but still elevated.
“Workers continue to shrug off any worries of a labor market downturn and businesses are hesitant to let go of any of their workforce,” Matthew Martin at Oxford Economics wrote in an investor’s note on Thursday. “The moderation in labor market data is unlikely to be strong enough to keep the Fed on pause, and we expect the FOMC to raise rates at the upcoming meeting in July.”
The minutes from the Federal Open Market Committee’s meeting last month suggest that further tightening is on the horizon to keep battling inflation.
“On balance, the staff saw the risks around baseline inflation forecast as tilted to the upside,” the minutes read, as economic scenarios with higher inflation appeared more likely than scenarios with lower inflation.
Adams said the Fed is going to relay more on hard data and less on forecasts, noting the central bank “got burned by relying on forecasts slowing in 2022 that didn’t pan out,” and they will want to “avoid making the same mistake twice.”
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