Hello, my name is Stephanie Aliaga and I am a research analyst at J.P. Morgan Asset Management, with an update on the recent data we’re seeing from the labor market and economic conditions.
Earlier this week, the Federal Reserve hiked rates by a quarter percentage point in what may be their final rate hike this cycle. Market anxieties now are less around the potential for further tightening and more around the potential for recession, as the economic landscape is looking increasingly precarious with the fallout from the regional banking crisis.
On the labor market, the official government data has been very resilient in recent months and the April jobs report continued that streak. Nonfarm payrolls rose a strong 253 thousand, well above consensus expectations. There was a layer of softness in the report, as the government revised payrolls in the last two months lower by nearly 150 thousand. But regardless, despite the climb in layoff announcements and unemployment claims that we’ve been seeing in recent months, it looks like excess demand for workers has so far been enough to absorb those layoffs, keeping the official unemployment rate at historically low levels.
The other concern for the Fed is wage growth, which is still too high for their comfort. The April Jobs report showed hot wage growth, up a half percentage point on the month and 4.4% from a year ago. While we wouldn’t put too much weight on this one data point, as overall demand for labor is softening, it’s surely not something a data-dependent Fed would like to see.
So what this mean for the recession calculus? Well if there was any question as to whether the economy entered recession in the first quarter, this report kind-of shuts that down. It also suggests we might even dodge one in the second quarter. But the labor market is usually the last one the break in an economic downturn, and when it does, things can change quite rapidly. Weak sentiment and declining job openings, not to mention businesses indicating a slowdown or pause in their hiring plans, point to slower job gains in the coming months and make it very unlikely that wage growth can continue at this speed.
Still, the real concern for the economy right now is not in the labor market, it’s in business conditions. Recent surveys have shown a tightening in credit availability and declines in capital spending plans. As the result of the Fed’s aggressive tightening cycle, credit is not only harder to find right now, but it’s also very expensive. Because of this, we could see business investment fall meaningfully in the coming quarters, raising the risk of recession this year. This should at least keep the Fed on pause, and will likely even warrant a pivot to rate cuts by the end of 2023.
Well thank you for listening. For more of our insights on inflation, the economy and investing you can check out our website at jpmorganfunds.com/insights or our mobile app “Insights” by J.P. Morgan Asset Management.
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This content is intended for information only based on assumptions and current market conditions and are subject to change. No warranty of accuracy is given. This content does not contain sufficient information to support investment decisions. It is not to be construed as research, legal, regulatory, tax, accounting or investment advice. Investments involve risks. Investors should seek professional advice or make an independent evaluation before investing. The value of investments and the income from them may fluctuate including loss of capital. Past performance and yield are not indicative of current or future results. Forecasts and estimates may or may not come to pass. JPMorgan Asset Management is the asset management business of JPMorgan Chase & Co and its affiliates worldwide.