WASHINGTON — The U.S. labor market has likely cooled over the past month, but remains fundamentally sound. That would be welcome news for the Federal Reserve as it seeks to fully rein in inflation.
When the Labor Department releases its latest jobs report on Friday, employers are expected to have added 190,000 jobs in June — a solid gain, though lower than the surprisingly robust 272,000 increase in May. The unemployment rate likely remained low at 4%, according to forecasters surveyed by the data firm FactSet.
From the Fed’s perspective, a slowdown in hiring to a still-reasonable pace would be about ideal. It would suggest the labor market is slowing enough to ease pressure on employers to raise wages sharply, which could stoke inflation, but not so much that it would trigger waves of layoffs.
That said, economists have repeatedly predicted that the labor market would lose momentum in light of the high interest rates created by the Fed, only to see hiring gains show unexpected strength. The economy has averaged a healthy 248,000 jobs per month so far in 2024That’s close to the 2023 average of 251,000, but lower than the stellar growth of 2022 (an average of 377,000 new jobs per month) and 2021 (a record 604,000), as the economy recovered from the COVID-19 recession.
“The labor market has really proven the skeptics wrong,” said Andrew Flowers, chief economist at Appcast, which uses technology to help companies recruit workers.
Still, Flowers suggested that the much higher borrowing costs imposed by the Fed’s rate hikes will ultimately weaken the labor market.
“Ultimately,” he said, “it will bend but not break. The slow bite of high interest rates will moderate job growth.”
There are already signs of an economic slowdown. U.S. gross domestic product — the total output of goods and services — grew by a slow annual pace of 1.4% from January to March, the lowest quarterly pace in almost two years.
Consumer spending, which accounts for about 70% of all economic activity in the US and has driven growth over the past three years, rose by only 1.5% latest quarter after growing by more than 3% in each of the previous two quarters. In addition, the number of advertised vacancies has been steadily declining since peaking at a record 12.2 million in March 2022.
Still, while employers may not be hiring as aggressively after struggling to fill positions over the past two years, they’re not cutting many either. Most workers enjoy an unusual level of job security.
“Companies are hiring less because of cooler demand,” said Bill Adams, chief economist at Comerica Bank. “But they’re also laying off fewer workers than they were before the pandemic. The labor market is tight, so companies don’t want to cut their workforce today and then find out tomorrow they need more workers and have trouble finding them.”
In 2022 and 2023, the Fed will raised its reference rate eleven times to overcome the worst wave of inflation in four decades, by taking the key interest rate to a 23-year high. The resulting punishingly higher lending rates for consumers and businesses were widely expected to be a recession. It didn’t. Instead, the economy and labor market have shown surprising resilience.
Meanwhile, inflation has been steadily declining from a peak of 9.1% in 2022 to 3.3%. In remarks this week at a conference in Portugal, Fed Chairman Jerome Powell noted that price increases in the United States slowed again after higher readings earlier this year. But, he cautioned, more evidence that inflation is moving toward the Fed’s 2% target would be needed before policymakers would cut rates.
Fed officials will surely be watching Friday’s jobs report for signs that wage pressures are easing. According to FactSet, forecasters believe average hourly earnings rose 3.9% last month from a year earlier. That would be the smallest increase since June 2021. But it would still outpace the 3.5% average annual wage growth that many economists consider consistent with 2% inflation.
The jobs report comes as Americans weigh the health of the economy ahead of November’s presidential election, with many blaming President Joe Biden for the high prices that continue to squeeze household budgets.
Some Americans are also feeling the effects of a weakening job market. One of them, Caleb Hennington, of Little Rock, Arkansas, was laid off from his marketing job in March.
“Since then it’s been a real struggle to find another opportunity,” said Hennington, 32, who said she has applied for more than 250 jobs.
“Most places completely ignore me after saying they’ll get back to me soon with a follow-up,” he said. “It’s mentally exhausting and even though I’ve been in marketing for 10 years, I’m struggling to find a new role. I’ve had to resort to freelance and part-time jobs to generate some income.”
