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  • Writer's pictureByron Gangnes

The FOMC and the labor market, a pre-meeting update

Today begins the two-day FOMC meeting on interest rates. The Fed is widely expected to raise the federal funds rate by a quarter point to the 5.25-5.50% range. How many further rate hiking might be in store? An essential element of FOMC decision-making has been the state of US labor markets, in particular their stubbornly persistent tightness. (Of course other factors will be important, particularly recent inflation progress, which I'll touch on below.)


Before the June FOMC meeting, I reviewed a set of five labor market indicators that might be considered by the Fed. I am going to update them here and make a few brief comments.


Here are the five labor market indicators:


1. Wages. Data on new wage offers from Indeed.com's Indeed Wage Tracker have continued the steady decline we have observed before, now standing at 5.1%. However, there has been no additional progress in easing of the government's measure of average hourly earnings, which have flat-lined at 4.4% for three months. Both measures tend to average about 3% over the long run.


Verdict: Wage pressures continue to be stubbornly persistent, even if the Indeed.com data on new wage offers provides hope that further progress may be coming.


year-on-year wage growth measured by Indeed.com and US average hourly earnings

2. Claims for unemployment compensation. The number of first-time filers for unemployment benefits picked up in June and July but has fallen back a bit in recent weeks.


Verdict: This still looks relatively favorable but not showing any signs of additional labor market softening.


initial and continuing claims for unemployment compensation

3. Job openings. The number of open jobs relative to the available labor pool has been trending downward, but it remains well above pre-pandemic levels. While some industries have seen continued easing, the overall picture remains largely the same as before the June FOMC meeting: a very slow decline in open jobs.


Verdict: An encouraging trend continues, but there has been little overall decline in the past month. Businesses are still having unusual difficulty finding qualified workers.


Job openings rates by six industries

4. Change in payroll employment. The net number of jobs created by US businesses has been on a downward trend for the past two years but rose in April and May. Since my last report, June data has come in at only 209,000 jobs added, the smallest increase since a decline in December 2020. While the pace of deceleration remains slower than in earlier stages of the recovery, this is heartening news that hiring may be pulling back.


Verdict: The pace of hiring has resumed easing, but we are not experiencing the kind of job contraction that we would normally see at or before the start of a recession.


monthly changes in US payroll jobs and two lines showing slowing of decline in recent year.

5. Unemployment. The unemployment rate has been running at or near half-century lows. After ticking up to 3.7% in May, it fell back to 3.6% in June.


Verdict: The proportion of the labor force looking for work remains unsustainably low.


US unemployment rate

Updated verdict for the labor market and this week's Fed decision


In my mind, there has been no appreciable change over the past month in labor market developments, other than relief from May's scary job surge. There has not been enough additional softening to make much of a difference for tomorrow's FOMC decision. The labor market remains tight and therefore likely to continue to drive inflation that exceeds desirable long-run performance.


But, as I mentioned before, by many measures progress toward easing labor market pressures is evident and ongoing, even if glacial. The economy is on track to slowly converge to satisfactory long-run labor market conditions. It is not clear that the Fed needs to raise interest rates further to accomplish this, but then I am not on the committee!


What else will the FOMC be looking for?


While Fed Chairman Powell has repeatedly put emphasis on the tight labor market as a key consideration in setting interest rate policy, that is not the only factor that will weigh on this week's decision, and perhaps more importantly the possibility of one or more hikes later this year.


Perhaps the most promising development since last month was the June CPI report, which showed continued inflation deceleration, to roughly 3%. And the Fed's bugaboo SuperCore inflation (services less housing) has continued to decline at an encouraging rate within the CPI data.


BUT, the Fed has tended to emphasize the Personal Consumption Expenditure (PCE) deflator, which has shown almost no letup in its SuperCore component. New data on the PCE won't be available until the end of the week.


Given Chairman Powell's past statements, the overall labor market picture is consistent with the anticipated quarter-point FOMC hike this week. What will be more interesting will be to hear what he has to say about ongoing labor market developments and what they might mean for future Fed actions.


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