July 11, 2023
The chart above paints a telling picture of what is underpinning the economy’s resilience, and why the Fed is likely to increase the federal funds rate at its July meeting.
While June’s payroll number was less than expected at 209,000, monthly jobs growth appears to have settled in a range of 200,000-300,000 since February. That’s higher than the average monthly payroll of 183,000 between 2010 and 2019.
At the same time, average hourly earnings growth (a proxy for wages) has steadied this year in a slightly elevated range of 4.3%-4.7%.
The continued above-trend growth in jobs and wages is why the economy has remained resilient, as plentiful employment opportunities have kept consumers spending.
This is why we expect another 25-basis point rate hike later this month. Fed Chair Powell has said below-trend growth and an increase in unemployment may be needed to bring inflation down to 2%. We think the Fed would be comfortable with monthly payrolls around 100,000-150,000.
Going forward it will be critical to watch if resiliency in job growth and wages can persist. More resilience will mean the Fed potentially considers additional hikes.
If resiliency deteriorates and job growth turns negative, the debate around a soft landing or mild recession will likely pick up.
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