The US job market is no longer hot. Companies are not hiring the way they were a year or two ago. But they are not cutting jobs, and American workers continue to enjoy an unusual level of job security.
This is what anti-inflationists at the Federal Reserve want to see: a gradual decline in employment that eases pressure on companies to raise wages — but avoids the pain of widespread layoffs.
When the Labor Department releases its July employment report on Friday, it is expected to show that employers added 175,000 jobs last month. That’s respectable, especially since Hurricane Beryl disrupted the Texas economy last month, but that will be down from 206,000 in June. Unemployment is expected to remain steady at a low 4.1%, according to a survey by economists at data firm FactSet.
“We’re actually in a good place right now,” Fed Chairman Jerome Powell told reporters Wednesday after the central bank’s latest meeting.
From January to June this year, the economy generated a solid average of 222,000 new jobs per month, down from 251,000 last year, 377,000 in 2022 and a record 604,000 in 2021 as the economy recovers from the COVID-19 shutdown.
The economy is weighing heavily on voters’ minds as they prepare for the presidential election in November. Many are not happy about the strong job gains of the past three years, instead they are upset about the high prices. In the past two years, inflation reached a fourteen-year high. Price increases have eased, but consumers are still paying 19% more for goods and services overall than they were before inflation started to pick up in spring 2021.
The June jobs report, while stronger than expected, came with some blemishes. First, the Labor Department’s revisions reduced payrolls for April and May by a combined 111,000. That meant monthly job growth reached 177,000 from April to June, the lowest three-month rate since January 2021.
In addition, the unemployment rate has increased over the past three months. If it unexpectedly grows in July – to 4.2% instead of the 4.1% forecast – it will cross the triple wire that has historically signaled an economic slowdown.
This is called the Sahm Rule, named after the former Fed economist who came up with it: Claudia Sahm. He found that a recession almost always continues if the unemployment rate (based on a three-month moving average) rises half a point from its low in the previous year. It has been triggered in every US recession since the 1970s. And it has only had two false positives since 1959; in both those cases – 1959 and 1969 – it was early, occurring a few months before the decline began.
Still, Sahm, now chief economist at investment firm New Century Advisors, said this time around “a recession is not imminent” even if unemployment exceeds the Sahm Rule threshold.
Many economists believe that today’s rising unemployment rates reflect an influx of new workers into the American workforce that sometimes need time to find work, rather than a dramatic increase in job losses.
“The demand for labor is falling,” said Matthew Martin, an American economist at Oxford Economics, “but companies are not laying off workers in large numbers, which reduces the likelihood of a negative response to rising unemployment leading to a loss of income, reduced spending, and more layoffs.”
Indeed, new Labor Department data this week showed that layoffs fell in June to their lowest level in more than a year and a half.
America’s job numbers have been unsettled by an unexpected surge in immigration — much of it illegal — over the past few years. The arrivals poured into the American labor force and helped ease labor shortages in the economy as a whole — but not all found jobs right away, driving up the unemployment rate. In addition, illegal immigrants are less willing to respond to the Labor Department’s employment survey, meaning they may not be counted as employed, notes Oxford’s Martin.
Still, Sahm remains concerned about declining employment, noting that the deteriorating job market can feed on itself.
“Once you have some momentum going down, you tend to go forward,” Sahm said. Sahm’s law, he says, “doesn’t work as well as it usually does, but it shouldn’t be ignored.”
Sahm urged Fed policymakers to unexpectedly cut interest rates at their meeting this week, but chose to leave them unchanged at the highest level in 23 years.
The Fed has raised rates 11 times in 2022 and 2023 to combat rising prices. Inflation has moderated accordingly – to 3% in June from 9.1% two years earlier. But it remains above the Fed’s 2% target and policymakers want to see more evidence that it continues to decline before they start cutting rates. However, they are expected to reach their first meeting at their next meeting in September.
Friday’s job report may give them encouraging news. According to FactSet, forecasters expect last month’s average hourly earnings to come in 3.7% above July 2023 levels. That would be the smallest gain since May 2021 and would mark a 3.5% advance that many economists see as consistent with the Fed’s inflation target. .
—Paul Wiseman, AP Economics writer
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