What does the August jobs report suggest about the U.S. labour market?
On the latest edition of Market Week in Review, Investment Strategy Analyst BeiChen Lin and Research Analyst Laura Bardewyck discussed the market reaction to recent remarks by U.S. Federal Reserve (Fed) Chair Jerome Powell. They also reviewed highlights from the U.S. August jobs report and chatted about the latest trends in the global housing market.
Unpacking the reaction to Powell's remarks at Jackson Hole
Bardewyck and Lin kicked off the segment by assessing the market's reaction to comments made by Powell at the Kansas City Fed's annual economic symposium, held in Jackson Hole, Wyoming. Lin said that in his 26 August speech, the Fed chair stressed that combating the highest inflation levels in decades remains the central bank's number-one priority. Powell also noted that another unusually large rate hike - to the tune of 75 basis points - could still be in play at the Fed's upcoming 20-21 September meeting, he added.
"Chair Powell did say that at some point, the central bank will probably slow the pace of rate hikes - but ultimately, for now, his key message was that the Fed remains committed to bringing inflation back to its target range of 2%, even if that results in some economic pain," Lin stated, adding that the Fed chair's remarks were in alignment with recent speeches made by several other central-bank officials.
Despite this, markets reacted negatively to Powell's comments, he noted, with the benchmark S&P 500® Index plunging over 3% on 26 August alone. So, why the sour reaction? Lin said he believes it's probably because market participants got a little too eager and enthusiastic after the Fed chair's remarks at the 26-27 July FOMC meeting. "Powell noted then that, at some point, the Fed could reduce the pace of rate hikes - and those comments appeared to please investors, even though Powell didn't specifically say that the Fed was going to do this. So I think it took his speech at Jackson Hole to really convey to markets that the central bank still has a long way to go before inflation is under control," he observed.
Lin concluded by noting that the Fed is not alone in its mission to curb inflation, with the European Central Bank, the Bank of Canada and the Bank of England, among others, all committed to restoring price stability - even at the expense of economic growth.
Key takeaways from the U.S. August employment report
Turning to the U.S. labour market, Lin noted that several key data points were released the week of 29 August. The first of these was the JOLTS (Job Openings and Labour Turnover Survey) report from the Department of Labour, which showed that there were 11.2 million job vacancies in the U.S. during July, he said.
"This demonstrates that the labour market remains very tight, with an imbalance between supply and demand. This is an issue that is of key concern for the Fed, because this mismatch could lead to additional wage inflation," Lin stated. Weekly initial unemployment claims for the week ending 27 August, released on 1 September, lend further credence to this idea, he said.
The biggest indicator of the health of the labour market was the U.S. nonfarm payrolls report for August, which was published 2 September by the Labour Department, Lin said. The report showed that the U.S. economy added 315,000 jobs last month - a number he characterised as really resilient. "In a nutshell, this shows that despite the slew of Fed rate hikes since March, the nation's economy - at least from a labour-market perspective - is holding up pretty well," Lin stated. He added that this makes the situation all the more challenging for the Fed as it seeks to fix the mismatch between supply and demand in the jobs market.
Lin said that the report also showed that the U.S. unemployment rate ticked up from 3.5% to 3.7%, primarily due to an increase in the number of individuals entering the workforce. He explained that this could actually be a good sign, as it suggests that labour supply and labour demand may be starting to come into closer alignment. Lin added that this could allow the Fed to still engineer a so-called soft landing - where growth slows but the economy doesn't slide into a recession.
Global housing market cools as rates rise
Bardewyck and Lin wrapped up their conversation with a look at the housing market, where rising rates have cooled demand across the globe. Referencing the annual Russell Investments Global Housing Inspection Report, released this past June, Lin stressed that the impacts of higher borrowing costs will affect some corners of the globe more than others.
For example, in the U.S., home prices still rose 18.6% on a year-over-year basis in June, according to the S&P CoreLogic Case-Shiller home price index, he said. Lin noted, however, that this was a slower increase than in May, when prices climbed by 20.5%. In addition, the more timely Zillow Home Value Index showed a month-over-month decrease of 0.1% in U.S. home prices during July, he remarked. "This is a sign that price momentum in the U.S. housing market is losing speed," Lin stated.
He added that in countries that have mortgage-rate structures that are shorter in duration - such as Canada, Australia and the UK - even more notable signs of home-price decreases have emerged. However, Lin stressed that in his view, a repeat of the 2008 global housing crisis is unlikely. "This time around, there are much more stringent lending standards in place that banks have to follow, and this should help the housing market navigate through the slowdown," Lin concluded.