Fed officials have made clear they are shifting their focus from a direct focus on inflation to at least as much concern about unemployment, and the latest data suggests their concerns are justified. Various indicators point to a slowdown, if not outright deterioration, in the labor market. History shows that once unemployment begins to accelerate, it does so quickly. “The Fed should be worried. These measures are already in motion,” said Troy Ludtka, senior U.S. economist at SMBC Nikko Securities. “Unemployment makes the stairs go down and the elevator goes up.” On Tuesday, The Conference Board released A monthly survey of consumer confidence is the latest sign of trouble with the employment situation. While overall data improved slightly in August, the survey painted a less optimistic picture of the labor market. The number of respondents who believed that employment opportunities were “plentiful” dropped slightly to 32.8%, while the number of respondents who believed that employment was “difficult to find” increased to 16.4%. Ludtka said that while July’s survey change was smaller, the gap between the two had dropped to 16.4 percentage points, more than 30 percentage points below the peak of 47.1 percentage points in March 2022. “When the economy goes into recession and the unemployment rate rises, you tend to see declines of this magnitude,” he said. Ludtka added that if historical trends hold, the gap is more consistent with an unemployment rate of 4.8%, higher than in July. The unemployment rate is half a percentage point higher. Other signs of trouble The Conference Board’s survey comes weeks after the Labor Department reported that nonfarm payrolls grew by just 114,000 jobs in July. Last week, the department also revealed in preliminary estimates that it had overestimated job growth from April 2023 to March 2024, by 818,000, the largest annual revision in 15 years. Neither news was welcomed by the Federal Reserve, which needs to balance its dual missions of full employment and price stability. With inflation gradually falling back to 2%, central bank officials have recently been saying that risks on both sides are balancing out, while emphasizing that policy should not be too strict, lest it stifle the job market and jeopardize the broader economy. Previously, the Fed has been committed to reducing inflation that hit a 40-year peak two years ago. The unemployment rate of 4.3% is 0.8 percentage points higher than the 3.5% level in July 2023. Federal Reserve Chairman Jerome Powell expressed some concerns about the employment situation in a closely watched speech last week, saying hiring had “cooled significantly” while noting that “we do not seek or welcome further cooling of labor market conditions.” “The Fed’s focus is going to be on employment,” said Beth Ann Bovino, chief economist at Bank of America. “Households have reason to be disappointed. This is a huge labor market. Now it’s getting more balanced.” It doesn’t feel good. Before you had five job offers, now you only get one. That’s what’s frustrating,” Bloomberg News said. “We’re not seeing any deterioration.” The central bank will start cutting interest rates soon. Markets are pricing in a 100% chance of a first rate cut in September, with most observers taking Powell’s speech as confirmation of imminent action. The pace of the Fed rate cuts is now the main question. Much may depend on the health of the labor market rather than the latest inflation data released on Friday. In their latest update, submitted in June, Fed officials said they expected the unemployment rate to remain high through 2026 and beyond. Stable, in fact, the unemployment rate will fall slightly to 4.2% in the long term. However, there is almost no historical precedent that this will be the case. The unemployment rate almost always rises or falls, and there is little evidence that the unemployment rate will remain stable in the long term. Stagnation. Although the unemployment rate will fall to 4.2% in August, the current momentum is still rising. However, SMBC Nikko predicts that the unemployment rate will reach 5% within a year. “When you talk to businesses…it doesn’t look like the labor market is healthy,” former Cleveland Fed President Loretta Mester said on CNBC on Tuesday. . “It’s slowing down. It’s going to be a challenge to make sure that monetary policy is adjusted while the labor market continues to be moderate, but not lose sight of the fact that inflation has not recovered yet to 2%,” she added. “The risk of balancing the two parts of the mission is something that’s happening now and something new.”
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