Tag: Bureau of Labor Statistics (BLS)

A Mixed Employment Report

Photo courtesy of Lena Buonanno.

During the last few months of 2023, the macroeconomic data has generally been consistent with the Federal Reserve successfully bringing about a soft landing: Inflation returning to the Fed’s 2 percent target without the economy entering a recession. On the morning of Friday, January 5, the Bureau of Labor Statistics (BLS) issued its latest “Employment Situation Report” for December 2023.  The report was generally consistent with the economy still being on course for a soft landing, but because both employment growth and wage growth were stronger than expected, the report makes it somewhat less likely that the Federal Reserve’s Federal Open Market Committee (FOMC) will soon begin reducing its target for the federal funds rate. (The full report can be found here.)

Economists and policymakers—notably including the members of the FOMC—typically focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best gauge of the current state of the labor market.

The report indicated that during December there had been a net increase of 216,000 jobs.  This number was well above the expected gain of 160,000 to 170,000 jobs that several surveys of economists had forecast (see here, here, and here). The BLS revised downward by a total of 71,000 jobs its previous estimates for October and November, somewhat offsetting the surprisingly strong estimated increase in net jobs for December.

The following figure from the report shows the net increase in jobs each month since December 2021. Although the net number of jobs created has trended up from September to December, the longer run trend has been toward slower growth in employment. In the first half of 2023, an average of 257,000 net jobs were created per month, whereas in the second half of 2023, an average of 193,000 net jobs were created per month. Average weekly hours worked have also been slowly trending down, from 34.6 hours per week in January to 34.3 hours per week in December.

Economists surveyed were also expecting that the unemployment rate—calculated by the BLS from data gathered in the household survey—would increase slightly. Instead, it remained constant at 3.7 percent. As the following figure shows, the unemployment rate has been below 4.0 percent each month since December 2021. The members of the FOMC expect that the unemployment rate during 2024 will be 4.1 percent. (The most recent economic projections of the members of the FOMC can be found here.)

Although the employment data indicate that conditions in the labor market are easing in a way that may be consistent with inflation returning to the Fed’s 2 percent target, the data on wage growth are so far sending a different message. Average hourly earnings—data on which are collected in the establishment survey—increased by 4.1 percent in December compared with the same month in 2022. This rate of increase was slightly higher than the 4.0 percent increase in November. The following figure shows movements in the rate of increase in average hourly earnings since January 2021.

In his press conference following the FOMC’s December 13, 2023 meeting, Fed Chair Jerome Powell noted that increases in wages at 4 percent or higher were unlikely to result in inflation declining to the Fed’s 2 percent goal:

“So wages are still running a bit above what would be consistent with 2 percent inflation over a long period of time. They’ve been gradually cooling off. But if wages are running around 4 percent, that’s still a bit above, I would say.”

The FOMC’s next meeting is on January 30-31. At this point it seems likely that the committee will maintain its current target for the federal funds. The data in the latest employment report make it somewhat less likely that the committee will begin reducing its target at its meeting on March 19-20, as some economists and some Wall Street analysts had been expecting. (The calendar of the FOMC’s 2024 meetings can be found here.)

Another Employment Report Consistent with a Soft Landing

Photo courtesy of Lena Buonanno.

In recent months, the macroeconomic data has generally been consistent with the Federal Reserve successfully bringing about a soft landing: Inflation returning to the Fed’s 2 percent target without the economy entering a recession. The Bureau of Labor Statistics’ latest Employment Situation Report, released on the morning of Friday, December 8,  was consistent with this trend. (The full report can be found here.)

Economists and policymakers—notably including the members of the Federal Reserve’s Federal Open Market Committee (FOMC)—typically focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best gauge of the current state of the labor market.

The report indicated that during November there had been a net increase of 199,000 jobs.  This number was somewhat above the expected gain of 153,000 jobs Reuters news service reported from its survey of economists and just slightly above an expected gain of 190,000 jobs the Wall Street Journal reported from a separate survey of economists. The BLS revised downward by 35,000 jobs its previous estimate for September. It left its estimate for October unchanged.  The following figure from the report shows the net increase in jobs each month since November 2021.

Because the BLS often substantially revises its preliminary estimates of employment from the establishment survey, it’s important not to overinterpret data for a single month or even for a few months. But general trends in the data can give useful information on changes in the state of the labor market. The estimate for November is the fourth time in the past six months that employment has increased by less than 200,000. Prior to that, employment had increased by more than 200,000 every month since January 2021.

Although the rate of job increases is slowing, it’s still above the rate at which new entrants enter the labor market, which is estimated to be roughly 90,000 people per month. The additional jobs are being filled in part by increased employment among people aged 25 to 54—so-called prime-age workers. (We discuss the employment-population ratio in Macroeconomics, Chapter 9, Section 9.1, Economics, Chapter 19, Section 9.1, and Essentials of Economics, Chapter 13, Section 13.1.) As the following figure shows, the employment-population ratio for prime-age workers remains above its level in early 2020, just before the spread of the Covid–19 pandemic in the United States.

The estimated unemployment rate, which is collected in the household survey, was down slightly from 3.9 percent to 3.7 percent. A shown in the following figure, the unemployment rate has been below 4 percent every month since February 2022.

The Employment Situation Report also presents data on wages, as measured by average hourly earnings. The growth rate of average hourly earnings, measured as the percentage change from the same month in the previous year, continued its gradual decline, as shown in the following figure. As a result, upward pressure on prices from rising labor costs is easing. (Keep in mind, though, as we note in this blog post, changes in average hourly earnings have shortcomings as a measure of changes in the costs of labor to businesses.)

Taken together, the data in the latest employment report indicate that the labor market is becoming less tight, reflecting a gradual slowing in U.S. economic growth. The data are consistent with the U.S. economy approaching a soft landing. It’s still worth bearing in mind, of course, that, as Fed Chair Jerome Powell continues to caution, there’s no certainty that inflation won’t surge again or that the U.S. economy won’t enter a recession.

Wall Street Journal: “Cooling Inflation Likely Ends Fed Rate Hikes”

The Bureau of Labor Statistics released its latest report on consumer prices the morning of November 14. The Wall Street Journal’s headline reflects the general reaction to the report: The inflation rate continued to decline, which made it less likely that the Fed’s Federal Open Market Committee will raise its target range for the federal funds rate again at its December meeting. The following figure shows inflation measured as the percentage change in the Consumer Price Index (CPI) from the same month in the previous year. It also shows the inflation rate measure using “core” CPI, which excludes prices for food and energy.

The inflation rate for the CPI declined from 3.7 percent in September to 3.2 percent in October. Core CPI declined from 4.1 percent in September to 4.0 percent in October. So, measured this way, inflation declined substantially when measured by the CPI including prices of all goods and services but only slightly when measured using core CPI.

The 12-month inflation rate is the one typically reported in the Wall Street Journal and elsewhere, but it has the drawback that it doesn’t always reflect accurately the current trend in prices. The following figure shows the 1-month inflation rate—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year— for CPI and core CPI. The 1-month inflation rate is naturally more volatile than the 12-month inflation rate. In this case, 1-month rate shows a sharp decline in the inflation rate for the CPI from 4.9 percent in September to 0.5 percent in October. Core inflation declined less sharply from 3.9 percent in September to 2.8 percent in October.

The release of the CPI report was treated as good news on Wall Street, with the Dow Jones Industrial Average increasing by 500 points and the interest rate on the 10-year U.S. Treasury Note declining from 4.6 percent just before the report was released to 4.4 percent immediately after. The increases in stock and bond prices (recall that the prices of bonds and the yields on the bonds move in opposite directions, so bond prices rose following release of the report) reflect the view of financial investors that if the FOMC stops increasing its target for the federal funds rate, the chance that the U.S. economy will fall into a recession is reduced.

A word of caution, however. In a speech on November 9, Fed Chair Jerome Powell noted that the FOMC may need still need to implement additional increases to its federal funds rate target:

“My colleagues and I are gratified by this progress [against inflation] but expect that the process of getting inflation sustainably down to 2 percent has a long way to go…. The Federal Open Market Committee (FOMC) is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance. We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

So, while the latest inflation report is good news, it’s still too early to know whether inflation is on a stable path to return to the Fed’s 2 percent target. (It’s worth noting that the Fed uses inflation as measured by the personal consumption expenditure (PCE) price index rather than as measured by the CPI when evaluating whether it has achieved its 2 percent target.)

A Review of Recent Macro Data

Some interesting macro data were released during the past two weeks. On the key issues, the data indicate that inflation continues to run in the range of 3.0 percent to 3.5 percent, although depending on which series you focus on, you could conclude that inflation has dropped to a bit below 3 percent or that it is still in vicinity of 4 percent.  On balance, output and employment data seem to be indicating that the economy may be cooling in response to the contractionary monetary policy that the Federal Open Market Committee began implementing in March 2022.

We can summarize the key data releases.

Employment, Unemployment, and Wages

On Friday morning, the Bureau of Labor Statistics (BLS) released its Employment Situation report. (The full report can be found here.) Economists and policymakers—notably including the members of the Federal Reserve’s Federal Open Market Committee (FOMC)—typically focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best indicator of the current state of the labor market.

The previous month’s report included a surprisingly strong net increase of 336,000 jobs during September. Economists surveyed by the Wall Street Journal last week forecast that the net increase in jobs in October would decline to 170,000. The number came in at 150,000, slightly below that estimate. In addition, the BLS revised down the initial estimates of employment growth in August and September by a 101,000 jobs. The figure below shows the net gain in jobs for each  month of 2023.

Although there are substantial fluctuations, employment increases have slowed in the second half of the year. The average increase in employment from January to June was 256,667. From July to October the average increase declined to 212,000. In the household survey, the unemployment rate ticked up from 3.8 percent in September to 3.9 percent in October. The unemployment rate has now increased by 0.5 percentage points from its low of 3.4 percent in April of this year. 

Finally, data in the employment report provides some evidence of a slowing in wage growth. The following figure shows wage inflation as measured by the percentage increase in average hourly earnings (AHE) from the same month in the previous year. The increase in October was 4.1 percent, continuing a generally downward trend since March 2022, although still somewhat above wage inflation during the pre-2020 period.

As the following figure shows, September growth in average hourly earnings measured as a compound annual growth rate was 2.5 percent, which—if sustained—would be consistent with a rate of price inflation in the range of the Fed’s 2 percent target.  (The figure shows only the months since January 2021 to avoid obscuring the values for recent months by including the very large monthly increases and decreases during 2020.)

Job Openings and Labor Turnover Survey (JOLTS) 

On November 1, the BLS released its Job Openings and Labor Turnover Survey (JOLTS) report for September 2023. (The full report can be found here.) The report indicated that the number of unfilled job openings was 9.5 million, well below the peak of 11.8 million job openings in December 2021 but—as shown in the following figure—well above prepandemic levels.

The following figure shows the ratio of the number of job opening to the number of unemployed people. The figure shows that, after peaking at 2.0 job openings per unemployed person in in March 2022, the ratio has decline to 1.5 job opening per unemployed person in September 2022. While high, that ratio was much closer to the ratio of 1.2 that prevailed during the year before the pandemic. In other words, while the labor market still appears to be strong, it has weakened somewhat in recent months.

Employment Cost Index

As we note in this blog post, the employment cost index (ECI), published quarterly by the BLS, measures the cost to employers per employee hour worked and can be a better measure than AHE of the labor costs employers face. The BLS released its most recent report on October 31. (The report can be found here.) The first figure shows the percentage change in ECI from the same quarter in the previous year. The second figure shows the compound annual growth rate of the ECI. Both measures show a general downward trend in the growth of labor costs, although compound annual rate of change shows an uptick in the third quarter of 2023. (We look at wages and salaries rather than total compensation because non-wage and salary compensation can be subject to fluctuations unrelated to underlying trends in labor costs.)

The Federal Open Market Committee’s October 31-November 1 Meeting

As was widely expected from indications in recent statements by committee members, the Federal Open Market Committee voted at its most recent meeting to hold constant its targe range for the federal funds rate at 5.25 percent to 5.50 percent. (The FOMC’s statement can be found here.)

At a press conference following the meeting, Fed Chair Jerome Powell remarks made it seem unlikely that the FOMC would raise its target for the federal funds rate at its December 14-15 meeting—the last meeting of 2023. But Powell also noted that the committee was unlikely to reduce its target for the federal funds rate in the near future (as some economists and financial jounalists had speculated): “The fact is the Committee is not thinking about rate cuts right now at all. We’re not talking about rate cuts, we’re still very focused on the first question, which is: have we achieved a stance of monetary policy that’s sufficiently restrictive to bring inflation down to 2 percent over time, sustainably?” (The transcript of Powell’s press conference can be found here.)

Investors in the bond market reacted to Powell’s press conference by pushing down the interest rate on the 10-year Treasury note, as shown in the following figure. (Note that the figure gives daily values with the gaps representing days on which the bond market was closed) The interest rate on the Treasury note reflects investors expectations of future short-term interest rates (as well as other factors). Investors interpreted Powell’s remarks as indicating that short-term rates may be somewhat lower than they had previously expected.

Real GDP and the Atlanta Fed’s Real GDPNow Estimate for the Fourth Quarter

On October 26, the Bureau of Economic Analysis (BEA) released its advance estimate of real GDP for the third quarter of 2023. (The full report can be found here.) We discussed the report in this recent blog post. Although, as we note in that post, the estimated increase in real GDP of 4.9 percent is quite strong, there are indications that real GDP may be growing significantly more slowly during the current (fourth) quarter.

The Federal Reserve Bank of Atlanta compiles a forecast of real GDP called GDPNow. The GDPNow forecast uses data that are released monthly on 13 components of GDP. This method allows economists at the Atlanta Fed to issue forecasts of real GDP well in advance of the BEA’s estimates. On November 1, the GDPNow forecast was that real GDP in the fourth quarter of 2023 would increase at a slow rate of 1.2 percent. If this preliminary estimate proves to be accurate, the growth rate of the U.S. economy will have sharply declined from the third to the fourth quarter.

Fed Chair Powell has indicated that economic growth will likely need to slow if the inflation rate is to fall back to the target rate of 2 percent. The hope, of course, is that contractionary monetary policy doesn’t cause aggregate demand growth to slow to the point that the economy slips into a recession.

Another Mixed Inflation Report

Fed Chair Jerome Powell and Fed Vice-Chair Philip Jefferson this summer at the Fed conference in Jackson Hole, Wyoming. (Photo from the AP via the Washington Post.)

This morning, the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for September. (The full report can be found here.) The report was consistent with other recent data showing that inflation has declined markedly from its summer 2022 highs, but appears, at least for now, to be stuck in the 3 percent to 4 percent range—well above the Fed’s 2 percent inflation target. 

The report indicated that the CPI rose by 0.4 percent in September, which was down from 0.6 percent in August. Measured by the percentage change from the same month in the previous year, the inflation rate was 3.7 percent, the same as in August. Core CPI, which excludes the prices of food and energy, increased by 4.1 percent in September, down from 4.4 percent in August. The following figure shows inflation since 2015 measured by CPI and core CPI.

Reporters Gabriel Rubin and Nick Timiraos, writing in the Wall Street Journal summarized the prevailing interpretation of this report:

“The latest inflation data highlight the risk that without a further slowdown in the economy, inflation might settle around 3%—well below the alarming rates that prompted a series of rapid Federal Reserve rate increases last year but still above the 2% inflation rate that the central bank has set as its target.”

As we discuss in this blog post, some economists and policymakers have argued that the Fed should now declare victory over the high inflation rates of 2022 and accept a 3 percent inflation rate as consistent with Congress’s mandate that the Fed achieve price stability. It seems unlikely that the Fed will follow that course, however. Fed Chair Jerome Powell ruled it out in a speech in August: “It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so.”

To achieve its goal of bringing inflation back to its 2 percent targer, it seems likely that economic growth in the United States will have to slow, thereby reducing upward pressure on wages and prices. Will this slowing require another increase in the Federal Open Market Committe’s target range for the federal funds rate, which is currently 5.25 to 5.50 percent? The following figure shows changes in the upper bound for the FOMC’s target range since 2015.

Several members of the FOMC have raised the possibility that financial markets may have already effectively achieved the same degree of policy tightening that would result from raising the target for the federal funds rate. The interest rate on the 10-year Treasury note has been steadily increasing as shown in the following figure. The 10-year Treasury note plays an important role in the financial system, influencing interest rates on mortgages and corporate bonds. In fact, the main way in which monetary policy works is for the FOMC’s increases or decreases in its target for the federal funds rate to result in increases or decreases in long-run interest rates. Higher long-run interest rates typically result in a decline in spending by consumrs on new housing and by businesses on new equipment, factories computers, and software.

Federal Reserve Bank of Dallas President Lorie Logan, who serves on the FOMC, noted in a speech that “If long-term interest rates remain elevated … there may be less need to raise the fed funds rate.” Similarly, Fed Vice-Chair Philip Jefferson stated in a speech that: “I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.”

The FOMC has two more meetings scheduled for 2023: One on October 31-November 1 and one on December 12-13. The following figure from the web site of the Federal Reserve Bank of Atlanta shows financial market expectations of the FOMC’s target range for the federal funds rate in December. According to this estimate, financial markets assign a 35 percent probability to the FOMC raising its target for the federal funds rate by 0.25 or more. Following the release of the CPI report, that probability declined from about 38 percent. That change reflects the general expectation that the report didn’t substantially affect the likelihood of the FOMC raising its target for the federal funds rate again by the end of the year.

Surprisingly Strong Jobs Report

Photo from Lena Buonanno

When the Bureau of Labor Statistics’ Employment Situation report is released on the first Friday of each month economists and policymakers—notably including the members of the Federal Reserve’s Federal Open Market Committee (FOMC)—focus on the change in total nonfarm payroll employment as recorded in the establishment, or payroll, survey. That number gives what is generally considered to be the best indicator of the current state of the labor market. The most recent report showed a surprisingly strong net increase of 336,000 jobs during September. (The report can be found here.)

According to a survey by the Wall Street Journal, economists had been expecting an net increase in jobs of only 170,000. The larger than expected increase indicated that the economy might be expanding more rapidly than had been thought, raising the possibility that the FOMC might increase its target for the federal funds rate at least once more before the end of the year.

To meet increases in the growth of the U.S. working-age population, the economy needs to increase the total jobs available by approximately 80,000 jobs per month. A net increase of more than four times that amount may be an indication of an overheated job market. As always, one difficulty with drawing that conclusion is determing how many more people might be pulled into the labor market by a strong demand for workers. An increase in labor supply can potentially satisify an increase in labor demand without leading to an acceleration in wage growth and price inflation.

The following figure shows the employment-to-population ratio for workers ages 25 to 54—so-called prime-age workers—for the period since 1985. In September 2023, the ratio was 80.8 perccent, down slightly from 80.9 percent in August, but above the levels reached in early 2020 just before the effects of the Covid–19 pandemic were felt in the United States. The ratio was still below the record high of 81.9 percent reached in April 2000. The population of prime-age workers is about 128 million. So, if the employment-population ratio were to return to its 2000 peak, potentially another 1.3 million prime-age workers might enter the labor market. The likelihood of that happening, however, is difficult to gauge.

A couple of other points about the September employment report. First, it’s worth keeping in mind that the results from the establishment survey are subject to often substantial revisisons. The figure below shows the revisions the BLS has released as of October to their preliminary estimates for each month of 2023. In three of these eight months the revisions so far have been greater than 100,000 jobs. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1 and Essentials of Economics, Chapter 13, Section 13.1), the revisions that the BLS makes to its employment estimates are likely to be particularly large when the economy is about to enter a period of significantly lower or higher growth. So, the large revisions to the preliminary employment estimates in most months of 2023 may indicate that the surprisingly large preliminary estimate of a 336,000 increase in net employment will be revised lower in coming months.

Finally, data in the employment report provides some evidence of a slowing in wage growth, despite the sharp increase in employment. The following figure shows wage inflation as measured by the percentage increase in average hourly earnings (AHE) from the same month in the previous year. The increase in September was 4.2 percent, continuing a generally downward trend since March 2022, although still somewhat above wage inflation during the pre-2020 period.

As the following figure shows, September growth in average hourly earnings measured as a compound annual growth rate was 2.5 percent, which—if sustained—would be consistent with a rate of price inflation in the range of the Fed’s 2 percent target.  (The figure shows only the months since January 2021 to avoid obscuring the values for recent months by including the very large monthly increases and decrease during 2020.)

As we note in this blog post, the employment cost index (ECI), published quarterly by the BLS, measures the cost to employers per employee hour worked and can be a better measure than AHE of the labor costs employers face. The first figure shows the percentage change in ECI from the same quarter in the previous year. The second figure shows the compound annual growth rate of the ECI. Both measures show a general downward trend in the growth of labor costs, although the measures are somewhat dated because the most recent values are for the second quarter of 2023.

Ultimately, the key question is one we’ve considered in previous blog posts (most recently here) and podcasts (most recently here): Will the Fed be able to achieve a soft landing by bringing inflation down to its 2 percent target without triggering a recession? The September jobs report can be interpreted as increasing the probability of a soft landing if the slowing in wage growth is emphasized but decreasing the probability if the Fed decides that the strong employment growth is real—that is, the September increase is not likely to be revised sharply lower in coming months—and requires additional increases in the target for the federal funds rate. It’s worth mentioning, of course, that factors over which the Fed has no control, such as a federal government shutdown, rising oil prices, or uncertainty resulting from the attack on Israel by Hamas, will also affect the likelihood of a soft landing.

The Labor Market Continues to Cool  

As we discussed in this post, most recent data are consistent with the labor market having cooled, which should reduce upward pressure on wages and prices. On Friday morning, the Bureau of Labor Statistics (BLS) released its employment report for August 2023. (The report can be found here.) On balance, the data in the report are consistent with the labor market continuing to cool.

Data from the establishment survey showed an increase in payroll employment of 187,000, which is close to the increase of 170,000 economists surveyed by the Wall Street Journal had forecast. The following figure shows monthly changes in payroll employment since January 2021.

Although the month-to-month changes have been particularly volatile during this period as the U.S. economy recovered from the Covid–19 recession, the general trend in job creation has been downward. The following table shows average monthly increases in payroll employment for 2021, 2022, and 2023 through August. In the most recent three-month period, the average monthly increase in employment was 150,000.

PeriodAverage Monthly Increases in Employment
2021606,000
2022399,000
Jan.-Aug. 2023236,000

The BLS revised downward its previous estimates of employment increases in June and July by a combined 110,000. The changes to the estimate of the employment increase for June are particularly notable. As the following graph shows, on July 7, the BLS initially estimated the increase as 209,000. The BLS’s first revision on August 4, lowered the estimate to an increase of 187,000. The BLS’s second revision on September 1, lowered the estimate further to 105,000. In other words, the BLS now estimates that employment increased by only half as much in June as it initially reported. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1 and Essentials of Economics, Chapter 13, Section 13.1), the revisions that the BLS makes to its employment estimates are likely to be particularly large when the economy is about to enter a period of significantly lower or higher growth. So, the large revisions to the June employment estimate may indicate that during the summer economic growth slowed and labor market conditions eased.

Data from the household survey showed the unemployment rate increasing from 3.5 percent in July to 3.8 percent in August. The following figure shows that the unemployment rate has fluctuated in a narrow range since March 2022. Employment as estimated from the household survey increased by 222,000. The seeming paradox of the number of people employed and the unemployment rate both increasing is accounted for by the substantial 736,000 increase in the labor force.

Finally, as the first of the following figures shows, measured as the percentage change from the same month in the previous year, the increase in average hourly earnings (AHE) remained in its recent range of between 4.25 and 4.50 percent. That rate is down from its peak in mid-2022 but still above the rate of increase in 2019, before the pandemic. But, as the second figure shows, if we look at the compound rate of increase in AHE—that is the rate at which AHE would increase for the year if the current rate of monthly increase persisted over the following 11 months—we can see a significant cooling in the rate at which wages are increasing.

As a reminder, AHE are the wages and salaries per hour worked that private, nonfarm businesses pay workers. AHE don’t include the value of benefits that firms provide workers, such as contributions to 401(k) retirement accounts or health insurance. As an economy-wide average they suffer from a composition effect during periods in which employment either increases or decreases substantially because the mix of high-wage and low-wage workers may change. AHE are also subject to significant revisions. Therefore, short-range changes in AHE can sometimes be misleading indicators of the state of the labor market.

Data Indicate Continued Labor Market Easing

A job fair in Albuquerque, New Mexico earlier this year. (Photo from Zuma Press via the Wall Street Journal.)

In his speech at the Kansas City Fed’s Jackson Hole, Wyoming symposium, Fed Chair Jerome Powell noted that: “Getting inflation back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions.” To this point, there isn’t much indication that the U.S. economy is experiencing slower economic growth. The Atlanta Fed’s widely followed GDPNow forecast has real GDP increasing at a rapid 5.3 percent during the third quarter of 2023.

But the labor market does appear to be softening. The most familiar measure of the state of the labor market is the unemployment rate. As the following figure shows, the unemployment rate remains very low.

But, as we noted in this earlier post, an alternative way of gauging the strength of the labor market is to look at the ratio of the number of job openings to the number of unemployed workers. The Bureau of Labor Statistics (BLS) defines a job opening as a full-time or part-time job that a firm is advertising and that will start within 30 days. The higher the ratio of job openings to unemployed workers, the more difficulty firms have in filling jobs, and the tighter the labor market is. As indicated by the earlier quote from Powell, the Fed is concerned that in a very tight labor market, wages will increase more rapidly, which will likely lead firms to increase prices. The following figure shows that in July the ratio of job openings to unemployed workers has declined from the very high level of around 2.0 that was reached in several months between March 2022 and December 2022. The July 2023 value of 1.5, though, was still well above the level of 1.2 that prevailed from mid-2018 to February 2022, just before the beginning of the Covid–19 pandemic. These data indicate that labor market conditions continue to ease, although they remain tighter than they were just before the pandemic.

The following figure shows movements in the quit rate. The BLS calculates job quit rates by dividing the number of people quitting jobs by total employment. When the labor market is tight and competition among firms for workers is high, workers are more likely to quit to take another job that may be offering higher wages. The quit rate in July 2023 had fallen to 2.3 percent of total employment from a high of 3.0 percent, reached in both November 2021 and April 2022. The quit rate was back to its value just before the pandemic. The quit rate data are consistent with easing conditions in the labor market. (The data on job openings and quits are from the BLS report Job Openings and Labor Turnover—July 2023—the JOLTS report—released on August 29. The report can be found here.)

In his Jackson Hole speech, Powell noted that: “Labor supply has improved, driven by stronger participation among workers aged 25 to 54 and by an increase in immigration back toward pre-pandemic levels.” The following figure shows the employment-population ratio for people aged 25 to to 54—so-called prime-age workers. In July 2023, 80.9 percent of people in this age group were employed, actually above the ratio of 80.5 percent just before the pandemic. This increase in labor supply is another indication that the labor market disruptions caused by the pandemic has continued to ease, allowing for an increase in labor supply.

Taken together, these data indicate that labor market conditions are easing, likely reducing upward pressure on wages, and aiding the continuing decline in the inflation rate towards the Fed’s 2 percent target. Unless the data for August show an acceleration in inflation or a tightening of labor market conditions—which is certainly possible given what appears to be a strong expansion of real GDP during the third quarter—at its September meeting the Federal Open Market Committee is likely to keep its target for the federal funds rate unchanged.

Unraveling the Mysteries of the May 2023 Employment Situation Report

(Photo from the Associated Press via the Wall Street Journal.)

During most periods, the “Employment Situation” report that the Bureau of Labor Statistics issues on the first Friday of each month includes the most closely watched macroeconomic data. Since the spring of 2021, high inflation rates have made the BLS’s “Consumer Price Index Summary” at least a close second in interest to the employment report. The data in the CPI report is usually more readily comprehensible than the data in the employment report. So, we think it’s worth class time to go into some of the details of the employment report, as we do in Macroeconomics, Chapter 9, Section 9.1, Economics, Chapter 19, Section 19.1, and Essentials of Economics, Chapter 13, Section 13.1.

When the BLS released the May employment report, the Wall Street Journal noted that: “Employers added 339,000 jobs last month; unemployment rate rose to 3.7%.” Employment increased … but the unemployment rate also rose? How is that possible? One key to understanding media accounts of the report is to note that the report contains data from two separate surveys: 1) the household survey and 2) the employment or establishment survey. As in the statement just quoted from the Wall Street Journal, media accounts often mix data from the two surveys.  

The data showing an increase of 339,000 jobs in May are from the payroll survey, while the data showing that the unemployment rate rose are from the household survey. Below we reproduce part of the relevant table from the report showing some of the data from the household survey. Note that total employment in the household survey falls by 310,000, so there appears to be no contradiction to explain—the unemployment rate increased because the number of people employed fell and the number of people unemployed rose. But why, then, did employment rise in the payroll survey?

Employment can rise in one survey and fall in the other because: 1) the types of employment measured in the two series differ, 2) the periods during which the data are collected differ, and 3) because of measurement error. The household survey uses a broader measure of employment that includes several categories of workers who are not included in the payroll survey: agricultural workers, self-employed workers, unpaid workers in family businesses, workers employed in private households rather than in businsses, and workers on unpaid leave from their jobs. In addition, the payroll employment numbers are revised—sometimes substantially—as additional data are collected from firms, while the household employment numbers are subject to much smaller revisions because data in the household survey are collected during a single week. A detailed discussion of the differences between the employment measures in the two series can be found here.

Usefully, the BLS publishes a series labeled “Adjusted employment” that estimates what the value for household employment would be if the household survey was measuring the same categories of employment as the payroll survey. In this case, the adjusted employment series shows an increase in employment in May of 394,000—close to the payroll survey’s increase of 339,000.

To summarize, the May employment report indicates that payroll employment increased, while the non-payroll categories of household employment declined, and the unemployment rate rose. Note also in the table above that the number of people counted as not being in labor force rose slightly and the employment-population ratio fell slightly. Average weekly hours (not shown in the table above) decreased slightly from 34.4 hours per week to 34.3.

A reasonable conclusion from the report is that the labor market remains strong, although it may have weakened slightly. Prior to release of the report, there was much speculation in the business press about how the report might affect the deliberations of the Federal Reserve’s Federal Open Market Committe (FOMC) at its next meeting to be held on June 13th and 14th. The report showed stronger employment growth than economists surveyed by Dow Jones had expected, indicating that the FOMC was likely to remain concerned that a tight labor market might continue to put upward pressure on wages, which firms could pass through to higher prices. Members of the FOMC had been signalling that they were likely to keep their target for the federal funds rate unchanged in June. The reported employment increase was likely not large enough to cause the FOMC to change course.

A Handy Way to Track Recession Indicators

The Bureau of Labor Statistics is housed in the U.S. Department of Labor. (Photo from don.gov site.)

In a blog post at the end of August, we noted that real GDP declined during the first two quarters of 2022. On September 29, the Bureau of Economic Analysis (BEA) slightly revised the real GDP data, but after the revisions the BEA’s estimates still showed real GDP declining during those quarters.

A popular definition of a recession is two consecutive quarters of declining real GDP. But, as we noted in the earlier blog post, most economists do not follow this definition. Instead, for most purposes, economists rely on the National Bureau of Economic Research’s business cycle dating, which is based on a number of macroeconomic data series. The NBER defines a recession as “a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.” The NBER discusses its approach to business cycle dating here.

The Federal Reserve Bank of St. Louis’s invaluable FRED economic data site has collected the data series that the NBER’s Business Cycle Dating Committee relies on when deciding when a recession began. The FRED page collecting these data can be found here. 

Note that although the Business Cycle Dating Committee analyzes a variety of data series, “In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.” The following figures show movements in those two data series. These data series don’t give a strong indication that the economy was in recession during the first half of 2022. Real personal income minus transfer payments did decline by 0.4 percent between January and June 2022 (before increasing during July and August), but nonfarm payroll employment increased by 1.4 percent during the same period (and increased further in July and August).

As we noted in our earlier blog post, the message from most data series other than real GDP seems to be that the U.S. economy was not in a recession during the first half of 2022.