Take Heed from Government Payroll Trends

Last Edited by: LPL Research

Last Updated: July 15, 2024

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Jeffrey Roach:

Hi, I'm Jeffrey Roach, Chief Economist for LPL Financial, with an update on what's happening in the global markets and the call to action for investors. First, disinflation is broadening out. I'm showing my inflation dashboard, and the key takeaway here is you see a lot of green on the far right, which just means that the rate of inflation is slowing and across several sectors, including core services and rents specifically. Markets have responded favorably to the tame readings of June. Inflation as softer inflation makes it easier for the Fed to begin cutting rates at the September meeting. Here are the details. Airfare prices fell 5% in June despite healthy demand for travel. In another report, we know the number of travelers at airports recently hit another record. Grocery prices, on the other hand, continue to rise month to month, making things difficult for lower income households who spend a larger percentage of their income on food. Services inflation also eased from a month ago.

Jeffrey Roach:

Excluding energy, core services inflation rose 0.1%. That's the smallest increase since mid 2021. So the bottom line here is something we've been saying for a while, which is softer inflation should allow the Fed to begin cutting rates in September as labor market data will likely move into the spotlight. Second, private payroll growth is softer than government payroll growth. I'm showing a chart here how payroll trends are very different when you break out government versus private sector payroll growth. And bottom line here is so far we don't see apocalyptic signs within the labor market, but investors should be wary when the labor market is supported by government payrolls. The downward revisions to the previous two months is consistent with an economic slowdown. And overall, the increase in the unemployment rate, especially for those with at least a bachelor's degree, suggests a modest cooling of the labor market.

Jeffrey Roach:

So we should expect more rhetoric out of the Fed about labor market conditions and the importance of keeping policy appropriate for their dual mandate. Third, workers are becoming less likely to move from job to job. Quits rates can serve as a measure of a worker's willingness to leave a job and do something else. When the labor market was tight and job openings were unusually plentiful, quits rates were high, but that's no longer the case. In fact, some sectors have quit rates below historical averages as you see in this chart. The churn in the leisure and hospitality sector is generally higher than other sectors as restaurant and hotel workers, for example, are quicker to move to another job than workers in most other sectors. However, labor churn is decreasing overall as the economy slows. A lower quits rate implies workers are less confident about finding another job.

Jeffrey Roach:

However, churn in healthcare and social assistance is higher than average. Quits rates and healthcare jobs are still elevated. I think that's suggesting wages in this sector might have more upside to keep those workers happy. The churn in construction jobs is also higher than normal, as employers still find it difficult to keep workers on the payroll. Markets have a lot to digest in the coming months. Labor markets are nearing an inflection point as some indicators suggest a slowdown in hiring. However, the U.S. equity market is entering the second half of this year with impressive momentum. Despite some signs of slowing economic growth primarily on the consumer level, earnings remain impressive in some sectors like healthcare, labor costs could increase in the near term, putting some pressure on profit margins. Now the good news is easing inflation pressures point to a potential rate cut from the fed later this year. Technically, the S&P 500 remains in a bullish market and above its long-term uptrend, but overbought conditions and notable divergences in market breath point to at least a potential short-term pause or a pullback in this rally. Now, seasonality data suggests dips should be bought as the S&P 500 tends to finish higher in the second half, especially after a strong first half. Well, that's all for now. If you want more insights in global market trends, follow us on social media and take care.

 

Dr. Jeffrey Roach, Chief Economist at LPL Financial discusses softer inflation, and the diverging payroll trends between private and public sectors.

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