July 5 : Washington, DC :
With the unemployment rate remaining unchanged at 4% and job growth slowing to a still-healthy pace in June, the likelihood that the Federal Reserve can rein in inflation without sending the economy plunging into recession has increased. Annual salary growth is anticipated to rise at its weakest rate in three years, according to the Labor Department's carefully watched employment report on July 5. Inflation rose in the first quarter, but the report would show that prices moderated in May, putting the disinflationary trend back on track.
It may also encourage the Federal Reserve to begin lowering interest rates later this year, as it would increase policymakers' optimism about inflation.
Optimism persists in financial markets Following significant monetary policy tightening in 2022 and 2023, the Federal Reserve may begin its relaxing cycle in September. The Federal Reserve Chair, Jerome Powell, reiterated this week that the economy is once again on a "disinflationary path," but he also highlighted the need for additional data before rate cuts are considered.
In his analysis, Boston College economics professor Brian Bethune concluded that the job market is entering a more normal and sustained expansionary phase. There has been no indication of a precipitous fall, nothing that would indicate we are about to collapse. Our focus remains on ensuring a smooth landing.
Economists surveyed by Reuters predicted a 190,000 job gain in June for nonfarm payrolls, following a 272,000 job surge in May. Over the past twelve months, the average number of jobs added has been around 230,000.
To accommodate the increase in the working-age population—which includes the new influx of immigrants—economists estimate that the economy must generate 150,000 new jobs every month.
Unpredictable youth unemployment helped push the unemployment rate up to 4% in May, the highest level since January 2022. In June, it was anticipated by some economists to fall back to 3.9%.
According to the Quarterly Census of Employment and Wages (QCEW), an outdated indicator of employment, the rate of job growth up until the end of 2023 was significantly lower than what was seen in the payroll statistics. The state unemployment insurance (UI) programs receive reports from employers, which are used to compile the QCEW statistics.
Undocumented immigrants, who analysts say helped fuel robust employment growth last year, are missing from the QCEW data. Next month, the benchmark estimate for payrolls for the twelve months ending in March will be released by the Bureau of Labor Statistics, which is part of the Labor Department.
Sam Coffin, an economist at Morgan Stanley, stated that payrolls are expected to be revised downwards, but that this is due to QCEW undercounting rather than payrolls being overcounted. It is highly probable that QCEW does not include those without proper authorization to work as it relies on UI information. You can't collect unemployment benefits if you can't legally work. The payroll survey, on the other hand, requests that all workers be included, notwithstanding their immigration status.
Sectors like as healthcare, leisure and hospitality, and state and local government education have been the main drivers of hiring, resulting in staffing levels that are comparable to those before the epidemic. Even if it was slower than in previous months, that pattern probably continued in June.
Firm formation has been hindered by the 525 basis point worth of rate hikes implemented by the Federal Reserve since 2022 in an effort to rein in inflation, and employment in these industries has largely returned to 2019 levels.
The COVID-19 pandemic has depleted people's money, which has led to a decrease in demand for goods and services as well as labor.
Sarah House, a senior economist at Wells Fargo, stated that businesses had to hire people quickly to get back on their feet. "That's mostly done in a lot of different industries.
The rise of the economy and consumer spending can be sustained by wage increases, even when the labor market is cooling.
Forecasts indicate that average hourly wages increased by 0.3% in June, following a 0.4% increase in May. As a result, the yearly growth in earnings would fall from 4.1% in May to 3.9%, the lowest gain since June 2021. Consistent with the Federal Reserve's 2% inflation target is wage growth in the range of 3-3.5 percent.
Since last July, the benchmark overnight interest rate set by the central bank has remained in the range of 5.25 to 5.50 percent. On July 3, the minutes of the Federal Reserve's meeting from June 11–12 were released, and they revealed that the policymakers had recognized the slowing economy and that "price pressures were diminishing."
Since worker productivity has increased, economists contend that the labor market is not the primary driver of inflation. They express concern that the Federal Reserve may hinder economic growth if it maintains high borrowing costs for an extended period of time. The senior fellow at the Washington Center for Equitable Growth, Kevin Rinz, noted that wage growth had been relatively robust earlier in this period but has since slowed. The once large gap between productivity growth and wage growth has narrowed as productivity growth has resumed its natural relationship with wage growth. Restricting the job market to bring inflation down doesn't appear to be a need right now.
