Federal Reserve officials have made it clear that they are turning at least equal concern to unemployment, rather than focusing narrowly on inflation, and the latest data suggests they are right to be concerned. A variety of indicators suggest that the labor market is at least slowing, if not outright worsening. And history shows that when unemployment starts to accelerate, it can do so quickly. “The Fed should be concerned. The gears are already in motion,” said Troy Rudka, senior U.S. economist at SMBC Nikko Securities. “Unemployment goes down the stairs and up the elevator.” Signs of the latest looming crisis in the employment situation came on Tuesday, when the Conference Board released its monthly survey of consumer confidence. While the headline figure for August showed some improvement, the labor market picture the survey painted was less rosy. The number of respondents who believe jobs are “plentiful” fell slightly to 32.8 percent, while the number who said jobs are “hard to come by” rose slightly to 16.4 percent. Rudka said that while the move from the July survey was small, the gap between the two narrowed to 16.4 percentage points, more than 30 percentage points below the March 2022 peak of 47.1 points. “Drops of this magnitude tend to occur when the economy is heading toward a recession and the unemployment rate is rising,” he said. If past trends hold true, the gap between the two would be more consistent at an unemployment rate of 4.8%, or 0.5 percentage points higher than the July rate, Rudka added. Other signs of trouble The Conference Board’s survey came just weeks after the Labor Department reported that nonfarm payrolls rose by just 114,000 in July. Last week, the department also revealed that its preliminary estimates had overstated job gains by 818,000 from April 2023 to March 2024, the largest annual revision in 15 years. Neither piece of news is welcome news for the Fed, which balances its twin mandates of full employment and price stability. With inflation gradually easing toward 2%, central bank officials have recently said both risks are leveling out, while stressing the importance of not making policy so strict that it weighs on the job market and puts the entire economy at risk. Previously, the Fed had thrown itself into a fight to bring down inflation, which hit a 40-year high two years ago. The 4.3% unemployment rate is 0.8 percentage points higher than the 3.5% rate in July 2023. Historically, such an increase coincides with a U.S. recession, known in economics as the “sum rule,” but the U.S. economy continues to grow. In a much-anticipated speech last week, Fed Chairman Jerome Powell expressed concern about the employment situation, saying that while employment is “quite cooling,” “we would not seek or welcome a further cooling in labor market conditions.” “The Fed’s focus will be on the employment side,” said Beth Ann Bovino, chief economist at U.S. Bank. “Households are understandably disappointed. It used to be a huge labor market. It’s becoming more balanced now. It doesn’t feel very good. Before, you had five offers, now you only get one. That’s the public frustration. Companies still have workers, but they’re canceling their offers. True, the number of job openings is down, falling to 8.2 million in June. That’s nearly 1 million fewer than a year ago and 4 million fewer than the record high in March 2022. Still, the current level is well above the level before the COVID-19 pandemic hit, and there are still about 1.2 job openings for every worker. San Francisco Fed President Mary Daly told Bloomberg News earlier this week that she “is not seeing a deterioration in the labor market,” but still expects the central bank to start cutting interest rates soon. Markets are 100% pricing in the possibility of a first rate cut in September, and most observers saw Powell’s speech as confirmation of an imminent move. It’s all about the data The biggest question now is how quickly the Fed will cut rates, which will probably depend more on the health of the labor market than on what the latest inflation readings, due to be released on Friday, show. In their last update, filed in June, Fed officials said they expect the unemployment rate to remain roughly flat beyond 2026, with a slight decline to 4.2% in the long term. But there is little historical precedent to suggest that this is the case. Unemployment rates almost always either rise or fall, with little evidence of long-term stagnation. While it is currently trending upwards, the consensus forecast for August is for the unemployment rate to fall to 4.2%, according to FactSet. Nonfarm payrolls are projected to increase by 175,000. But SMBC Nikko Securities sees the unemployment rate in the mid-5% range a year from now, which could force the Fed into a more aggressive rate-cutting stance. “When you talk to businesses, it doesn’t seem like the labor market is unhealthy,” former Cleveland Fed President Loretta Mester told CNBC on Tuesday. “The labor market is easing. The challenge will be whether you’re calibrating monetary policy as the labor market continues to ease, but you can’t lose sight of the fact that inflation is not back up to 2 percent yet,” she added. “Balancing the risks to these two mandates is what’s happening now and what’s new.”
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The Fed will now focus on the jobs part of its mission, and for good reason.
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