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The June Employment Report Says the Fed "Job" of Reversing Inflation in the Economy is Far From Done

The June employment report has several important implications and consequences for policymakers and investors. In short, the Fed's "job" of reversing inflation impulses in the general economy is far from done. And with operating profits already in decline, higher official rates will only intensify the squeeze on margins and profits. Here's why.


First, an economy generating over 300,000 jobs a month is well above its potential. June's gain of 372,000 followed an increase of 384,000 in May and 368,000 in April. Adding 1.12 million workers over the last three months should quiet talk of recession and put the focus back on inflation.


Second, official rate hikes and tightening financial conditions have done little to undo the tightness in labor markets. The civilian unemployment rate stood at 3.6% at the end of Q2, off 0.3 percentage points from the start of the year. And it's near a 50-year low. The relatively low joblessness shields the Fed from politics as it fights inflation pressures.


Third, rising wages for production and non-supervisory workers have much more significant inflation implications than the high inventory levels at a few large retailers. Average hourly earnings for production and non-supervisory workers, which cover 80% of the workforce, rose 0.5% in June and 6.4% over the past twelve months. In contrast, retail inventory of general merchandise, clothing, and furniture represents less than 8% of total inventory in the economy. Consequently, rising wage costs have more significant and broader inflation implications.


Fourth, in Q2, the increases in jobs and average hourly earnings ( a proxy for employee compensation) increased at an annualized rate of 8.8%. The projected growth in nominal GDP is running well below that pace, so the implication is that operating profits fell in Q2 after declining in Q1. As the Fed continues on the higher rate policy path, the squeeze on operating profits will intensify.

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