Fed officials have made clear that they are shifting their focus from a direct focus on inflation to at least as much concern about unemployment, and the latest data suggests that their concern is well-founded. Various indicators suggest that the labor market is, if not outright deteriorating, at least slowing. History has shown that once unemployment starts to accelerate, it accelerates quickly. “The Fed should be concerned,” said Troy Ludtka, chief U.S. economist at SMBC Nikko Securities. “The gears are already in motion. Unemployment is taking the stairs down and the elevator up.” The latest signs of trouble for the jobs picture came Tuesday when the Conference Board released its monthly survey of consumer confidence. While the headline figure for August showed a slight improvement, the picture the survey painted for the labor market was not rosy. The number of respondents who said jobs were “plentiful” fell to 32.8%, while the number of those who said employment was “hard to come by” rose to 16.4%. While the moves from the July survey were small, the gap between the two narrowed to 16.4 percentage points, or more than 30 percentage points below its peak of 47.1 points in March 2022, according to Ludtka. “Declines of this magnitude tend to occur when the economy is headed into recession and when the unemployment rate is rising,” he said. If historical trends hold true, the gap between the two is more consistent with an unemployment rate of 4.8%, or half a percentage point higher than the July rate, Ludtka added. Other signs of trouble The Conference Board survey comes just weeks after the Labor Department reported that nonfarm payrolls grew by just 114,000 jobs in July. Last week, the department also revealed, in a preliminary estimate, that it had overstated job gains from April 2023 to March 2024 by about 818,000, the largest annual revision in 15 years. Both pieces of news are unwelcome news for the Fed as it balances its dual mandate of full employment and price stability. With inflation gradually creeping back toward 2%, central bank officials have recently been saying that the risks to either side are about equal, emphasizing the importance of not keeping policy so tight that it stifles the labor market and puts the broader economy at risk. Previously, the Fed has been locked in a battle to bring down inflation, which peaked in 40 years two years ago. The unemployment rate, at 4.3%, is about 0.8 percentage points higher than the 3.5% rate in July 2023. That kind of uptick has historically been consistent with recessions in the United States, under what’s known as the “contribution rule” for the economy, even though the U.S. economy continues to grow. In his closely watched speech last week, Fed Chair Jerome Powell expressed some concern about the jobs picture, saying hiring had “slowed substantially” while noting that “we do not seek or welcome further slowdowns in labor market conditions.” “The focus at the Fed will be on the jobs front,” said Beth Ann Bovino, chief economist at U.S. Bank. “Households are really disappointed. It was a great labor market. Now it’s more balanced. That doesn’t look good. Before you got five offers, now you get one. That’s the frustration that’s out there. Companies are still holding on to their workers, but they’re cutting those vacancies. Job openings have actually shrunk, to 8.2 million in June, about a million less than a year ago and 4 million less than the historic peak in March 2022. Still, the current level is well above where it was before the Covid pandemic hit, and there are still about 1.2 workers available for every vacancy. “We haven’t seen any deterioration in the labor market,” San Francisco Fed President Mary Daly told Bloomberg News earlier this week, though she still expects the central bank to start cutting rates soon. Markets are pricing in a 100% chance of an initial rate cut in September, and most observers saw Powell’s speech as confirmation that a move is imminent. Now the key question is how quickly the Fed will cut rates, and that will likely depend on Much more depends on the health of the labor market than the latest inflation numbers due out on Friday. In their most recent update, given in June, Fed officials indicated that they expect the unemployment rate to remain steady through 2026 and beyond, and in fact decline slightly to 4.2% over the long term. However, there is little historical precedent to suggest that this will be the case. The unemployment rate almost always trends either higher or lower, with little evidence of extended plateaus. The current momentum is up, although the August consensus estimate is for the unemployment rate to decline to 4.2%, according to FactSet. Nonfarm payrolls are expected to expand by 175,000. However, SMBC Nikko sees the unemployment rate in the 5% range by mid-year, which could force the Fed to take a more aggressive stance on cutting interest rates. “When you talk to businesses … it doesn’t sound like the labor market is unhealthy. It’s moderating,” former Cleveland Fed President Loretta Mester said Tuesday on CNBC. “That’s going to be a challenge, to make sure that you calibrate your monetary policy to the labor market as it continues to moderate, perhaps, but without losing sight of the fact that inflation is not back to 2% yet.” She added: “Balancing those risks for both parts of the mandate is kind of what’s happening now, and what’s new.”
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The Fed will now focus on the employment part of its mission—and for good reason.
