Earlier today, the June employment report was released. And our analysis suggests it could be the exact news stocks need to power to fresh 52-week highs in July.
Specifically, we saw four things in this jobs data that should provide upside firepower for equities over the next few weeks. Two of them confirmed we’re not in or even close to a recession. And two others confirmed we don’t need many more rate hikes from the Fed.
Together, all four suggest stocks should keep powering higher for the foreseeable future.
Job Growth Is Stabilizing
First, it is very clear that job growth is stabilizing in a manner that suggests the economy is on solid footing.
The labor market is the bedrock of the U.S. economy. Consumer spending accounts for ~70% of GDP, and consumers spend when they have jobs and incomes. As goes the labor market, so goes the economy.
Throughout 2022, the labor market slowed. But here in 2023, it has stabilized strongly. Every month this year, the economy has added more than 200,000 jobs. And that trend continued in June, with the economy creating 209,000 jobs.
This sudden stabilization in the pace of job growth suggests the economy is on very solid footing right now and is not teetering on the brink of recession.
Jobs Data Shows Low Unemployment
Second, the unemployment rate remains near all-time lows in a sign that a recession is not imminent.
Excluding the COVID-induced recession (which was very unique for a number of reasons), every major U.S. recession over the past 70 years has been preceded by a steady uptick in the unemployment rate from cycle lows.
That’s just how this works. People start losing their jobs, then the economy plunges into a recession. Not the other way around. Unemployment rates are a leading indicator of economic health.
And the unemployment rate isn’t budging right now. It clocked in at 3.6% in June and has been hanging around that level for over a year. So long as unemployment rates remain near record-lows, recessions fears will remain overblown.
Wage Inflation Is Normalizing
Third, wage inflation continues to normalize in a manner that suggests the Fed doesn’t need to do much more to get wages back to “normal.”
Average hourly earnings rose 4.4% in June. That is just a hair lower than the wage inflation rate in May. And it continues what has been a multi-month deceleration in wage inflation from a peak of nearly 6% in March 2022.
The trajectory of average hourly earnings growth is down and to the right. Assuming this trajectory persists – and there appears to be no reason it won’t – then wage inflation should fully normalize to its pre-pandemic standards by early next year.
Weakness In Temp Job Hiring
Fourth, weakness in temporary jobs hiring is a warning sign to the Fed that it shouldn’t hike much further, else it will risk a recession.
Temporary help is a strong leading component of the overall employment report. Employers typically let temporary staff go before they let full-time employees go.
And right now, the pace of temporary jobs hiring is crashing. It has actually been contracting on an annual basis for several months. As the chart below illustrates, the pace of temporary help hiring is a strong leading indicator of overall hiring, with a lead of about six months.
Therefore, it appears that while the labor market remains strong, cracks are forming. If the Fed puts pressure on those cracks with more rate hikes, the whole labor market could break. And we believe that risk should prevent the Fed from being too aggressive with its next few moves.
The Final Word on the Jobs Data
Overall, we think this jobs data is pretty bullish for stocks. It was a “Goldilocks” report – hot enough to confirm the strength of the economy and to ease recession fears, but not hot enough to create re-inflation fears or warrant further policy tightening.
That’s very good news for stocks. It means the big rally we’ve seen so far in 2023 will likely last for the rest of the year.
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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.