Does the June jobs report indicate a soft landing?

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Phoebe White: Welcome to Research Recap on J.P. Morgan's Making Sense podcast channel. I'm Phoebe White, Head of U.S. Inflation, Market Strategy at J.P. Morgan. And today, I'm joined by my colleague, Mike Feroli, Chief U.S. Economist at J.P. Morgan. And we're here to discuss takeaways from the June U.S. employment report, as well as the path ahead for the economy and the Fed. Mike, thanks so much for joining.

Mike Feroli: Thanks for having me.

Phoebe White: So Mike, what were your high-level takeaways from this report?

Mike Feroli: Yeah, so the headline number was actually very close to expectations at 206,000. Still a good number. Trend does seem to be moderating here because we did have downward revisions of 111,000 to the prior two months. I guess one of the more notable details was the unemployment rate ticked up to 4.1%. In itself, not a big move. But now that we've had three months of the unemployment rate consecutively ticking higher, we've gone from a cycle low of 3.4% to now 4.1%. So not a lot of significant moves between months. But cumulatively, we've seen a decent move there. Average hourly earnings came in at three-tenths of a percent, which was in line with the moderating trend we've seen. The year ago number move down to 3.9%, which is a not too worrisome number from an inflation perspective. So those are some of the main things we saw last week.

Phoebe White: Can you touch on, maybe, the composition of the hiring in that 206,000 number? We did see step down, or we have seen a step down in the pace of private payroll gains, but the breadth still seems pretty strong. The diffusion index ticked up. What's your reading on the composition?

Mike Feroli: We did get 70,000 government jobs, which is another strong number and, again, still being driven by a lot of state and local hiring. Private job growth looked more modest at 136,000. Within that, about over 60% was in health care and social assistance. As has been the case for much of the last year, government and health care seem to be really the big drivers of some of these job gains we're seeing.

Phoebe White: OK, what are the growth implications from this number? Do you think it's consistent with the 2% GDP growth forecast you have for the second quarter?

Mike Feroli: Yeah, I think so. We're probably tracking perhaps a little below 2% given some of the other numbers we got last week, including the trade and the construction report. But overall, it feels like this is consistent with a relatively modest pace of GDP growth.

Phoebe White: So is this consistent with, I guess, a soft-landing story? As you said, we also saw the step down in wage growth. Should wage inflation continue to cool? Is this all good news?

Mike Feroli: Yeah, so far it does look consistent with the soft landing. Not only is wage growth slowing, we're seeing some of the forward-looking measures like the Indeed wage tracker look a little softer. So right now, it does look like things are on that soft landing path. I guess the only issue is, does the slowing continue or do we stop this pace of deceleration right around here? And in that case, I would say that would be a very welcome outcome.

Phoebe White: So clearly, the Fed has been putting a lot of attention on the JOLTS report, and we actually saw job openings tick higher in this last release. We've also seen the quits rate moving sideways for the last seven months or so. Is there anything we should be taking from that report?

Mike Feroli: So JOLTS did very modestly tick up from a downward revised level. The vacancy to unemployment ratio was unchanged at 1.2. The quits rate, which is kind of where we were at the end of the last cycle, the quits rate continues to be near where it was at the end of the last cycle. So all of these measures, including the unemployment rate for that matter, are consistent with a still relatively tight labor market, not as tight as it was. So a little better balance, I think, on the broad set of data.

Phoebe White: OK, and then I guess also touching on initial jobless claims. We have seen the four week moving average there move higher. It's still at a low level. Is there anything in any of the data that's telling you we should be more concerned about a pickup in layoffs?

Mike Feroli: So not only are the initial claims move a little higher, the continuing claims now have moved higher for, I think, it's been eight or nine consecutive weeks. So that's certainly something we're watching in terms of a potential continuation of some of the slowing we've seen in the labor market.

Phoebe White: And then, I guess, just fundamentally, when you think about the health of businesses and consumers, anything else you would point to that could be highlighting a potential shift in behavior here when we think of spending or hiring?

Mike Feroli: So I would say the fundamental health of both businesses and consumers still looks pretty good. Now for consumers, maybe not quite as good as it did a year or two ago. Certainly, as many people have noted, delinquencies are up, particularly, for autos and credit cards. Excess savings may have been decumulated. So perhaps, the consumer isn't quite as robust as was the case a year ago but still in pretty good condition.

Phoebe White: And on the business sentiment side, I guess, we saw the ISM Services survey weaken quite a bit last week. Anything we should take from that report?

Mike Feroli: So sentiment has been depressed and looks like it's getting worse. Sentiment has been actually pretty depressed since early 2022 for a lot of measures, which hasn't been followed through by weakness in the data. Now I suspect that, perhaps, some of what we're seeing now is some of-- some of the policy uncertainty may be seeping into some of these sentiment numbers. Certainly, there's a possibility that a lot of tax policy, trade policy, a lot of things could change in six months from now.

Phoebe White: So let's, I guess, touch on your forecasts because I think you still have 4.1% unemployment at the end of the year. I'm just curious is your expectation that we will see things stabilize, or is there any reason we shouldn't expect the unemployment rate to continue higher from these levels?

Mike Feroli: I think the risk is that it drifts a little higher from here, particularly, if some of those downside risks on GDP growth materialize. Next week, we'll get retail sales so get another checkup on the consumer. But yeah, I would say more likely up and down from here.

Phoebe White: And interestingly, that 4.1 is already above what the Fed had penciled in for the unemployment rate for the end of this year and the summary of economic projections. And now we will have two more employment reports before the September FOMC, three CPI reports. What do you think we'll need to see in the data for the Fed to feel comfortable cutting in September?

Mike Feroli: I think we're getting close to that. We'll get a CPI report this week, which I think if it's anything like the one we saw in May, could clear the way for the Fed to start talking more openly about cutting this year. I think after the first quarter disappointments on CPI, they've been a little more guarded on that. But I think this could, again, if we get a softer CPI report opened the way for them to, perhaps, by the time we get to Jackson Hole really be signaling easing.

Phoebe White: And your forecast is 2/10 on core CPI for June?

Mike Feroli: 2/10 on core CPI, 1/10 on headline.

Phoebe White: And for now, you still have the first cut coming in November, quarterly cuts thereafter. So we compare that to how the market is priced right now. The market is still implying something like two cuts for this year, about 150 basis points of easing by the end of next year. So a bit more than our own baseline forecast. But as you mentioned, risks do seem to be shifting around that. So against this backdrop, we think yields could probably trade in a range here through the course of the summer. We still have a year-end forecast for 10 year yields at 4:40. So, with that, let me close. Mike, thanks for joining today.

Mike Feroli: Thanks for having me.

Phoebe White: And thank you to our listeners for tuning in. We hope you join us again next month. For more research insights, visit jpmorgan.com/research.

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