Strong economic data signals another rate hike in July

REAL ECONOMY BLOG | July 06, 2023

Authored by RSM US LLP

A series of economic reports released on Thursday showed a much more resilient economy than expected heading into a crucial period when the Federal Reserve is on the verge of hiking interest rates again.

While the data on job openings and jobless claims showed some softening inside the labor market, June’s net employment change from ADP posted a significant upside surprise, adding nearly half a million net jobs—far above the consensus forecast of 245,000 for the month.

Initial jobless claims rose again last week to 248,000 from 236,000, resuming the long-term upward trend of the 13-week moving average above 240,000.

There were 9.8 million job openings in May, down from 10.3 million in April. That brought the ratio between openings and unemployed workers down to 1.61 from 1.82.

Despite the continuing softening in the labor market, the mismatch between labor demand and supply remains a top concern for the Fed.

Underneath the top-line openings number, hirings and quits picked up—a sign of strength in the labor market—while layoffs fell for the second straight month. The data was consistent with the 339,000 net jobs added to payrolls in May.

June’s employment data will be released on Friday, a key metric ahead of the Fed’s highly anticipated meeting later this month. Given how resilient the labor market has been, we expect another robust employment report with 245,000 jobs added and a fall in the unemployment rate to 3.5%.

On top of that is a hotter-than-expected service sector in June, according to data from the Institute of Supply Management. Service-provider sentiment grew at a much faster rate of 53.9 from 50.3 in May on the heels of better production, more orders and stronger employment.

Barring any shocks from the payroll and inflation reports later this month, we expect the Fed to hike its policy rate one more time, in July, to bring the rate to 5.5%.

As of now, we do not think another hike in September or after that this year is going to take place as the economy in our estimation will be a lot weaker when the next rate decision comes.

There is more impact from tightening monetary policy and fading excess savings to come as American consumers are heading toward the back-to-school shopping season, when we expect a decline in spending and, as a result, weaker job gains.