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July JOLTS data from the US Bureau of Labor Statistics (BLS) showed a continuing decline in the job openings. The excess demand for labor continued to ease, and job openings fell in most broad industry categories. Takeaways: The number of jobs openings continued to edge down in July. The downward drift since Spring 2022 has reduced worker shortages, although they remain high by historical standards The extent of job shortage has varied across industries, but job openings rates are now trending downward in nearly every sector. While JOLTS data still show a tighter-than-normal labor market, things are heading in the right direction. This is good news for future Federal Reserve interest rate decisions. See the complete article on LinkedIn.

Tight US labor markets—shortages of available workers—have been cited frequently by Federal Reserve officials as a reason that interest rates must be pushed higher to reduce inflationary pressure. While healthy employment levels are good for employees and the overall economy, persistent excess demand for labor can drive up wages too rapidly. This raises business costs, which may be passed through into higher consumer prices. Recently I discussed two of the most frequently publicized indicators. In advance of this week's meeting of the Federal Open Market Committee (FOMC), what can we say about current labor market conditions if we take a broader look? Here are five labor market indicators: 1. Claims for unemployment compensation. The number of people filing for unemployment benefits has been very low, but it has picked up since last fall and is now very similar to pre-pandemic levels. Verdict: A promising sign that excessive labor market tightness is beginning to ease. 2. 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. It is encouraging that some of the sectors with the largest number of open jobs are also ones that are seeing the fastest retreat, as business activity tapers off. These include the leisure and hospitality industry, which passed through a strong post-pandemic recovery period, and the struggling tech sector (included in Professional and Business Services). Some other major sectors that have experienced weaker activity recently (for example construction) now have job openings rates close to 2019 levels. Verdict: An encouraging trend, but businesses are still having trouble finding workers. 3. Wages. Growth in average hourly earnings has declined from its peak in early 2022, but remains higher than normal. Data on new wage offers from Indeed.com's Indeed Wage Tracker show a continuing steady decline in advertised wage growth from more than 9% in early 2022 to just over 5% in May. Both measures tend to average about 3% over the long run. Verdict: Wage pressures are easing surely but slowly. 4. Change in payroll employment. The net number of new payroll jobs created by US businesses has been on a downward trend for the past two years but rose in April and May. Even if recent increases do not signal a return to robust job growth, the rate of deceleration has slowed compared with its behavior between mid-2021 and mid-2022. Verdict: Firms continue to hire more rapidly than expected, and the most recent data defies a generally downward trend. 5. Unemployment. The unemployment rate has been running at or near half-century lows. For a while, this was explained in part by a slow return of workers to the labor force in the pandemic's aftermath, but the labor force is now above its 2019 level. The unemployment rate did rise in May, from 3.4% to 3.7%, but that is not substantially higher than the 3.6% recorded in February. Verdict: The proportion of the labor force looking for work remains unsustainably low. Verdict for the labor market overall? The labor market remains tight and therefore likely in the short run to continue to drive inflation that exceeds desirable long-run performance. But by many measures, progress toward easing labor market pressures is already evident and clearly ongoing. The economy is on track to slowly converge to satisfactory long-run labor market conditions. What might all of this mean for this week's FOMC meeting? Fed Chairman Powell has repeatedly put emphasis on the tight labor market as a key consideration in setting interest rate policy. For example, from his prepared remarks for his press conference following the May FOMC meeting and responses to reporters' questions: "We remain committed to bringing inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored. Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions." He acknowledged that some progress in normalizing labor market conditions has been made: "...[T]here are some signs that supply and demand in the labor market are coming back into better balance. The labor force participation rate has moved up in recent months.... Nominal wage growth has...shown some signs of easing, and job vacancies have declined so far this year." But still, he contends that labor demand remains "extraordinarily tight": "But overall, labor demand still substantially exceeds the supply of available workers." So the question is whether the FOMC has now seen enough evidence of ongoing labor market slowing to consider this problem well on the way to being solved without the need for further rate hikes. To be sure, labor market conditions are only one of the many factors that the Fed will consider when it makes its rate decision Wednesday. Keeping rates fixed for now—the so-called "pause"—will also depend on whether they see sufficient signs that aggregate demand and economic activity are weakening (Powell noted several places where they are beginning to see such slowing), remaining tightness in lending conditions in the wake of the Silicon Valley Bank collapse, inflationary expectations, and of course the recent path of inflation itself. In this regard, keep an eye out tomorrow for the June Consumer Price Index (CPI) release. While the Fed puts more emphasis on the alternative PCE measure, which continues to show worrisome inflation momentum, a big movement in one of the key CPI components, like costs of shelter or other services, could have an impact on their decision. In addition to these factors, the Fed recognizes that monetary policy acts with a lag, so a pause may be appropriate simply to give the central bank time to see whether the substantial interest rate hikes of the past year will yet feed through to more significant economic slowing and a return to its long-run 2% inflation goal. The overall labor market picture is consistent with a Fed pause in rate hikes at this week's FOMC meeting.

The leading Economic Indicators® (LEI) index from The Conference Board fell for the fourteenth straight month in May. A fall of this extent and magnitude has almost always been followed by a recession within the next twelve months. Could it be wrong this time around? The LEI is a composite index that reflects movements in ten underlying indicators. Over recent months, the biggest negative contributions have come from two forward-looking indicators of spending, consumer expectations of future business conditions and the index of new business orders from the Institute for Supply Management's® Report on Business®. These suggest possible weakness in future consumer and business spending. Financial market variables are also pointing to contracting activity ahead. The Leading Credit Index™, which summarizes several measures of borrowing costs and availability, has worsened, and the difference (spread) between yields on ten-year and two-year bonds, is sharply "inverted," a sign that expectations of future growth are low and current borrowing costs high. As you can see, below, the LEI® has been a fairly reliable predictor of US recessions in recent years. Not every decline is a strong indicator. According to The Conference Board, a recession signal occurs when a majority of the ten LEI® components is in negative territory and when it has fallen by more than 4.2% over a six-month period. The LEI® has been in this range since the end of last year. Could the LEI® be getting it wrong this time around? Even though the overall index has fallen steadily and sharply, there are several places where we are seeing unusual strength for this stage of the business cycle: The stock market has risen strongly, the residential business cycle has turned upward, and (as we have noted frequently before) the labor market remains very tight. The stock market could drop, of course, since it is overvalued by traditional measures (a topic for another day). But the unusual strength of the labor market is probably the biggest source of uncertainty. While people report poor expectations of future business conditions, their assessment of their own financial conditions has remained much more positive, and aggregate employment levels and job opportunities remain high. This may continue to support consumer spending even as other parts of the economy slow. I still think a mild recession is likely later this year into 2024, but despite leading indicators it is not a foregone conclusion.

The third estimate of first quarter GDP was released this morning, showing a sharp upward revision to previous estimates, from 1.3% in the second revision to 2% in the third. GDP figures go through several rounds of revision because of delays in reporting and tabulating data. It is not unusual for the international trade categories in particular to see substantial revision because of reporting delays. However, the GDP revisions overall were larger than usual and larger than had been expected. There were large upward revisions to the estimated growth of personal consumption of services and residential investment, which contracted somewhat less than indicated by earlier releases. The biggest revisions came in the international trade categories, where export were revised sharply higher and imports lower (the latter subtract from GDP, so this is also a "positive" revision). Revised downward were nonresidential fixed investment and personal consumption of goods. Because of their differing absolute sizes, the contributions of each category to GDP growth can be very different from their percentage changes. The modest-looking revision to personal consumer spending growth accounts for more than a third of the overall revision to GDP growth (0.27 percentage points of the overall 0.7 percentage point revision). While much smaller in size, the international trade categories represent an even bigger share of the upward revision. Because investment spending is a small category, its modest downward revisions barely register in the overall total. What to make of these revisions? For one, they reaffirm the relative strength of the service sectors of the economy, compared with goods-producing sectors. The strength of services has prevented slowing of the economy but has been a concern of the Fed, since inflation has been persistent in this category. (The overall PCE Price index was revised downward very slightly.) Stronger exports may suggest overseas demand has held up better than many had thought. There have been a number of unexpectedly strong economic reports over the past week, and stock investors for one have rallied in response to optimism about business prospects. However, this might prove misplaced if the Fed decides that insufficient slowing requires more and larger interest rate hikes to cool inflation. We shall see.

Base effects are back in the economic conversation as inflation falls from its mid-2022 peaks. So what are base effects and why do they matter? Simply put, the term base effect refers to the fact that measures of change over time depend on what prior period you are comparing to. OK, well, duh. But it turns out that this can make a big difference in interpreting real-world statistics. Take inflation. Economists (including me) who report on inflation usually do so on a year-over-year basis, calculating the inflation rate as the amount of price change since the same month a year ago. There is a good reason for doing this, since inflation is very choppy month-to-month, and making comparisons over a longer time frame smoothes out short-term volatility and does not give too much weight to an idiosyncratic monthly jump or drop. But this can also give a biased views of developments during a time period when inflation is rapidly rising or declining. For example, last fall year-over-year inflation measures were comparing price levels that included the summer run-up to the much lower average prices that prevailed at the end of 2021. That produced high measured estimates of year-over-year inflation that only gradually receded even as monthly changes had decelerated considerably. You can see this in the graph below that compares year-over-year consumer price inflation to a measure that compares average prices over the most recent three months to those prevailing in the preceding three-month period. Notice how the CPI path flattened after June, 2022 and how the year-over-year inflation measure didn't fully reflect that slowing until very recently. Calculating something like this, or using a three-month moving (trailing) average, allows us to see recent developments that may not be obvious in the year-over-year figures. In recent months, base effects have tended to pull measured inflation downward. This has been most dramatic for some inflation components that were temporarily expensive during the pandemic and its aftermath. As gasoline and other fuel prices have fallen back from high levels last summer, year-over-year comparisons to those temporarily high prices have resulted in large measured price declines, even though the prices are now pretty stable month-to-month. Same thing for new and used auto prices, which soared during the pandemic when component supplies were curtailed. Food prices may soon do the same thing. So as we get beyond the period of temporarily super-high prices, the end of favorable base effects is one reason that some economists (including Yours Truly) expect that progress bringing inflation down the rest of the way to the Fed's 2% goal will be harder and take longer than the progress we have seen so far.

The manufacturing sector continues to contract. The ISM® Purchasing Managers Index® (PMI®) for manufacturing has been below 50 for eight month in a row, and in June was at its lowest level since May 2020 during the very beginning of pandemic recovery. (A value below 50 indicates that more firms than not report contracting business activity. I discuss this here.) Manufacturing industrial production has been flat to slightly down since December of last year, after moderate growth in 2022. Weighing on manufacturing have been higher borrowing costs, upward wage pressures, lingering disruptions to supply chains, and weak demand as consumers have shifted toward service consumption after the boom in purchases of physical goods during the pandemic. As a result of weaker production activity, manufacturing employment has softened considerably, falling in two of the past three months, even as the economy overall has continued to add jobs at a (too?) healthy pace. Nearly all sub-sectors of manufacturing have seen a steep downshift in hiring since last fall, with the sharpest effects in nondurable goods, particularly in industrial supplies like chemicals and plastics, as well as paper and printing. The only major category still experiencing robust employment growth is the motor vehicle sector, where demand and production are moving upward as auto sales recover from very low 2022 levels. It would be nice if we could find signs that the manufacturing recession is bottoming out. Unfortunately, more detailed indicators within the ISM® Purchasing Managers Index® paint a pretty pessimistic picture. Notably, forward-looking indicators of current and backlogged orders are among the most negative measures. In particular, a far greater number of firms have been reporting a falling backlog of orders compared with those reporting an expanding order book. (Separate Commerce Department data on new factory orders also show weakness.) If we want to look really hard for positive news in the ISM® Report on Manufactures®, then in addition to a somewhat less widespread decline in new orders in June, inventories have been moving in the "right" direction, with a substantial proportion of firms reporting that their own inventories and those of their clients are contracting, potentially setting the stage for future production. But this is pretty weak evidence that the manufacturing environment is set to improve. And at this point, the recent flatlining of manufacturing production is nothing like the decline in output that we might expect if the overall US economy slows sharply or enters a recession later this year or in 2024. In a typical US downturn, industrial production drops 4-9% from peak to trough (it fell much further during the two very severe recent recessions). So manufacturing activity could decline more significantly if demand drops off in coming months. How large a role might manufacturing itself play in causing a US recession to begin? Perhaps not very much. Manufacturing represents a relatively small 11% share of US GDP and an even smaller 8% of total US employment. What happens in manufacturing is important for these industries and their workers, but it is not a dominant force in the overall US economy.

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. 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. 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. 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. 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. 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.

Out today is the Institute for Supply Management's® Services Purchasing Managers Index (PMI®). A good opportunity to discuss diffusion indexes. A diffusion index reports the difference between positive and negative responses, in this case, the difference between those purchasing managers for businesses who are reporting expanding activity and those who are reporting contracting activity. The ISM® reports these both for the manufacturing sector and the services sector. As the Institute for Supply Management® reports the index, values above 50 mean that more than half of individuals surveyed report expanding activity; readings below 50 indicate that more than half of respondents report contracting activity. How far away from 50 you are does not indicate how severely activity is expanding or contracting, but rather how widespread expansion or contraction is. As you can see, the manufacturing PMI® has been contracting now for seven consecutive months, one indicator that the manufacturing part of the economy is already in recession. The service index has generally been above 50, although it dipped below 50 in December and was just barely above in May. By the PMI®, services sectors of the economy have been doing much better than manufacturing, but they still show signs of weakness. The ISM® also reports various sub-indexes that give more detailed info. You can read more about it on their web site.

Today saw the release of the January JOLTS data by the US Bureau of Labor Statistics. JOLTS (Job Openings and Labor Turnover Summary) data track, well, just that. How many job openings there were in January, and information on turnover: the number of hires and separations from employment for various reasons. These days we are tracking the JOLTS for indications of how tight the labor market is and where it might be headed. The quick take on January's report is that the number of job openings has fallen back just a tad, but remains high. There were slightly more layoffs than in December, but they remain pretty low. The Big Picture hasn't changed from recent months: There are a VERY large number of job openings these days, one indicator of how tight the US labor market is. Here is a graph of the difference between employment and open jobs on the one hand, and the size of the labor force on the other. This is a meaningful measure of excess demand for labor, since it tells us how many bodies firms are willing to employ compared with the number of people working or available for work. In January there were about 5 million more jobs than workers. There is considerable excess demand for labor compared with the pre-pandemic period, and that this has not really fallen off at all. The labor market is still very hot! Part of this is due to strong business demand for workers, but part is also due to the failure of the labor force to recover to its previous level. But that's a story for another day... Job openings data is available by industry, and taking a look at just a few, we can see that there are higher numbers of open jobs across the board compared with the number before the pandemic. Employees are particularly hard to come by in manufacturing, where the number of openings is about twice what it was in December 2019. (BTW, what I have done in the graph is to "normalize" each industry's job openings to a value of one in December, 2019, so we can compare today's numbers relative to a common starting point. Also, because the data jumps around a lot from month to month--we say it is "noisy"--I am showing the average value over the past three months.) These days the Federal Reserve is particularly concerned about the state of the labor market, because of upward wage pressure that tends to come when labor is in excess demand. The JOLTS data is just one of the federal datasets that can shed light on the state of the labor market. February data on jobs, employment, and unemployment is coming soon.

On Sunday, OPEC made a surprise announcement that it would reduce crude oil production by 1 million barrels (bbl) per day, rising to perhaps 1.6 million bbl/day by late summer. Oil futures have jumped to about $80 recently in anticipation of the effect of the production cuts on the global oil supply-demand balance. Some analysts have predicted $100/bbl oil in coming months as a result of the production cuts. Certainly the cut in OPEC production is unwelcome at a time of rising stress on the US and global economies. Higher crude oil prices will raise business costs and lead to a temporary upward blip in inflation. If that feeds through into ongoing inflation, it will make the Fed's disinflation job harder, potentially leading to higher interests for longer. But a little perspective is important. In inflation-adjusted terms, even at $80/bbl crude oil prices are running below the average price that has prevailed over the 2004-2022 period. (Prices averaged about $88.50 over this period, measured in 2022 dollars.) A price of $100 in June would equal about $94/bbl measured in 2022 dollars.* That would be nearly a third higher than the March average price, but only 7% higher than the long-run average. At that level, it is hard to see how this would have a significant adverse impact on business costs and the macroeconomy. To be sure, no one knows how high oil prices will actually move in response to the OPEC supply cut. A higher peak would have a bigger adverse macroeconomic effect. It would have been nice if they had held off for now, but spending needs of some OPEC governments apparently drove the decision. One clear adverse consequence is that, despite the Western embargo on Russian oil, higher world market prices will help fuel the Russian war machine. Oil prices have implications that extend beyond their purely economic ones. *I have to assume something about US consumer price inflation in coming months in order to calculate the future real price of oil measured in 2022$, if the nominal market price rises to $100 by June. I assume the CPI slowed from 6% in February to 5.5% in March, but then accelerates back to 6% for the April-June period because of the higher oil prices. Different reasonable assumptions would not materially affect the real price estimate.