The Line: Job Growth Stronger Than Expected in June

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

The June employment report is out. Here are the highlights:

• 372,000 jobs were added last month, much higher than the 250,000 forecast.

• Private-sector employment is now 140,000 higher than before the pandemic.

• The unemployment rate was unchanged at 3.6%.

• Average hourly earnings rose by 5.1% over the past year, slightly higher than expected.

• These industries added the most jobs last month: professional and business services (+74,000), leisure and hospitality (+67,000), and healthcare (+57,000).

So, a very positive report, and can’t we all use more good news these days? I know what you’re thinking: If the labor market is so hot, why are so many people saying the U.S. is in a recession? Probably because there’s a good chance it already is in a recession. The highest inflation in over 40 years has dramatically reduced the purchasing power of Americans. It’s great that wages are rising at a 5.1% annual pace, but prices were rising at an 8.6% rate as of May. People had saved at a record level during the worst of the pandemic, but the savings rate is now down to more historically normal levels and credit card balances are surging. Remember that consumer spending is 70% of the economy, and retail sales were down in May. To combat this inflation, the Federal Reserve is now forced to raise interest rates at a very fast pace. These hikes are specifically designed to slow the economy down, which would then drive prices lower. While The Fed aims for a "soft landing"—where it reduces inflation without causing a recession—that will not be the case this time, as they waited too long to act. I know it seems impossible to have a recession when companies are hiring so many workers, the unemployment rate is near a record low, and there are still over 11 million unfilled jobs out there. In fact, the first sign of a looming recession is when the opposite of all that happens. However, consumers are tapped out and the stock market just had the worst first half of a year since 1970. Remember also that GDP actually fell by 1.6% in the first quarter of this year—halfway toward the typical definition of a recession, where GDP falls for two straight quarters. In my opinion, if we are not in a recession yet, we will be soon. The good news is that it will whip inflation and bring mortgage rates lower (see below). I also believe the recession will be a short one, with economic growth returning at the beginning of 2023.

The average rate for a 30-year mortgage fell to 5.30% last week, down from 5.70% the prior week. This was a huge drop, fueled by concerns of a recession. As I’ve said before, any significant decline in rates presents an opportunity for both buyers and sellers of real estate. Buyers benefit as the total cost of a home is reduced, while sellers will have more potential buyers interested in their property. So, to all those real estate brokers out there: Reach out to your clients and tell them the time to act may be now.

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