June employment supports patience over hikes

Research evidence excerpt

June employment supports patience over hikes

IdeaM

Exhibit 2: Payroll growth appears to have decelerated, pointing Exhibit 3: Participation rates for the prime working age

to less risk of overheating population saw an inexplicably large drop in June

Change in nonfarm payrolls (thous) Labor force participation: 25-54y olds

250 85

m/m chg

3m avg chg 150

50 82

-50

-100 80

-150

-200 15 17 19 21 23 25

Jul 25 Sep 25 Nov 25 Jan 26 Mar 26 May 26

Source: BLS, Haver Analytics, Morgan Stanley Research Source: BLS, Haver Analytics, Morgan Stanley Research

Hours worked among production and nonsupervisory workers slowed sharply on the

month, reinforcing our overall view that labor market momentum moderated. The payroll

proxy for all workers and for production and nonsupervisory workers rose 4.1% and 4.5%

q/q saar, respectively in 2Q, about in line with where inflation is running on a year-on-year

basis, suggesting real household purchasing power remains under pressure. Payroll

income growth has held up, but inflation has offset much of the gain, helping explain

slower consumer spending and a lower saving rate. Weakness in hours worked is

particularly concerning because it affects workers who are most closely tied to the

economic cycle. That said, our inflation outlook points to a broadening out of purchasing

power across households, but that will take time. In the meantime, we expect the saving

rate to stay near cycle lows.

The June labor market data comes on the heels of other incoming data and information

that keep us comfortable thinking the Fed will stay on hold for through year-end; namely

WTI commodity prices that have fallen below $70/bbl and comments from Fed Chairman

Kevin Warsh at this week's ECB conference in Sintra that "inflation risks have come down