The June Employment Report Says the Fed "Job" of Reversing Inflation in the Economy Is Far From Done
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Summary
The June employment report has several important implications and consequences for policymakers and investors. In short, the Fed's "job" of reversing inflation impulses in the general economy is far from done. And with operating profits already in decline, higher official rates will only intensify the squeeze on margins and profits. Here's why.
First, an economy generating over 300,000 jobs a month is well above its potential. June's gain of 372,000 followed an increase of 384,000 in May and 368,000 in April. Adding 1.12 million workers over the last three months should quiet talk of recession and put the focus back on inflation.
Second, official rate hikes and tightening financial conditions have done little to undo the tightness in labor markets. The civilian unemployment rate stood at 3.6% at the end of Q2, off 0.3 percentage points from the start of the year. And it's near a 50-year low. The relatively low joblessness shields the Fed from politics as it fights inflation pressures.
Third, rising wages for production and non-supervisory workers have much more significant inflation implications than the high inventory levels at a few large retailers. Average hourly earnings for production and non-supervisory workers, which cover 80% of the workforce, rose 0.5% in June and 6.4% over the past twelve months. In contrast, retail inventory of general merchandise, clothing, and furniture represents less than 8% of total inventory in the economy. Consequently, rising wage costs have more significant and broader inflation implications.
Fourth, in Q2, the increases in jobs and average hourly earnings ( a proxy for employee compensation) increased at an annualized rate of 8.8%. The projected growth in nominal GDP is running well below that pace, so the implication is that operating profits fell in Q2 after declining in Q1. As the Fed continues on the higher rate policy path, the squeeze on operating profits will intensify.
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Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.