The Federal Reserve will maintain current rates until the labor market weakens, keeping financial conditions tight until then. This has been my consistent message since 2022. Recent discussions around a possible recession have been sparked by the 4.3% unemployment rate reported in the latest jobs report. While historically low, this rate has increased from the previous lows of 3.5%. Despite no job losses or negative GDP growth, concerns are rising about the Fed’s perceived lag in responding, especially after their decision not to cut rates in the recent meeting. Is the labor market truly in trouble? Let’s delve into the data.
Jobless claims data
To signal a traditional job-loss recession with job cuts, negative GDP, and economic contraction, I believe jobless claims must exceed 323,000 on the four-week moving average. While this threshold hasn’t been breached yet, jobless claims have been steadily increasing, inching closer to that level. The focus should be on this data point, released every Thursday morning.
As job losses mount, more individuals will file for unemployment benefits. While some may delay filing due to severance packages, a significant spike in job losses would lead to a rapid increase in jobless claims. Currently, the claims are gradually trending upwards.
Job openings
According to the BLS, the number of job openings remained steady at 8.2 million in June. This metric is crucial for the Fed to assess labor market balance. Previously concerned about excessive job openings driving rapid wage growth, the Fed now finds the current level of around 8 million acceptable.
The job openings report also includes data on hires and quits, both of which are at pre-pandemic levels. The Fed appears content with the current state of job openings, indicating a more balanced labor market supply.
BLS Jobs report
From BLS: The unemployment rate rose to 4.3 percent in July, with nonfarm payroll employment increasing by 114,000. Sectors like health care, construction, and transportation saw job growth, while information lost jobs.
Despite the unemployment rate climbing to 4.3%, job losses have not been a significant factor each month. The labor force has expanded by approximately 1.3 million compared to a year ago. The recent increase in unemployment can be partly attributed to external factors like a natural disaster, but the overall trend remains positive.
Construction employment continues to rise, a crucial indicator for economic cycle timing. Typically, this sector experiences notable job losses before a recession, which has not been the case so far.
Wage growth
Wage growth is slowing down, a concern for the Fed that aimed to curb excessive wage increases. Currently at 3.60% year over year, down from a peak of 5.9% in March 2022, wage growth is approaching the Fed’s desired target of 3%. Once it dips below 3.5%, the countdown to achieving this target begins.
Final conclusion
While the labor market has softened as desired by the Fed, it has not yet reached a breaking point. The Fed’s deliberate tightening of policy since 2022 aimed to achieve this balance. By focusing on labor market indicators, they aim to have confidence in their decisions to adjust rates as needed. Despite criticisms of their approach, recent market movements show a positive response. Monitoring labor data will be crucial for predicting rate adjustments in the future.
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