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Weak Jobs Report Provides Further Evidence of Labor Market Softening

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This morning (September 5), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for August. The data in the report show that the labor market was weaker than expected in August.

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of only 22,000 nonfarm jobs during August. This increase was well below the increase of 110,000 that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had forecast a smaller increase of 75,000 jobs. In addition, the BLS revised downward its previous estimates of employment in June and July by a combined 21,000 jobs. The estimate for June was revised from a net gain of 14,000 to a net loss of 13,000. This was the first month with a net job loss since December 2020. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure makes clear the striking deceleration in job growth since April. The Trump administration announced sharp increases in U.S. tariffs on April 2. Media reports indicate that some firms have slowed hiring due to the effects of the tariffs or in anticipation of those effects.

The unemployment rate increased from 4.2 percent in July to 4.3 percent in August, the highest rate since October 2021. The unemployment rate is above the 4.2 percent rate economists surveyed by FactSet had forecast. As the following figure shows, the unemployment rate had been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month May 2024 to July 2025 before breaking out of that range in August. In June, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate during the fourth quarter of 2025 would average 4.5 percent. The unemployment rate would still have to rise significantly for that forecast to be accurate.

Each month, the Federal Reserve Bank of Atlanta estimates how many net new jobs are required to keep the unemployment rate stable. Given a slowing in the growth of the working-age population due to the aging of the U.S. population and a sharp decline in immigration, the Atlanta Fed currently estimates that the economy would have to create 97,591 net new jobs each month to keep the unemployment rate stable at 4.3 percent. If this estimate is accurate, continuing monthly net job increases of 22,000 would result in a a rising unemployment rate.

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 288,000 jobs in August, following a net decrease of 260,000 jobs in July. As an indication of the volatility in the employment changes in the household survey note the very large swings in net new jobs in January and February. In any particular month, the story told by the two surveys can be inconsistent. as was the case this month with employment increasing much more in the household survey than in the employment survey. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those aged 25 to 54. In August the ratio rose to 80.7 percent from 8.4 percent in July. The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is still above what the ratio was in any month during the period from January 2008 to February 2020. The increase in the prime-age employment-population ratio is a bright spot in this month’s jobs report.

It is still unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in federal government employment of 15,000 in August and a total decline of 97,000 since the beginning of February 2025. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has had a small effect on the overall labor market.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.7 percent in August, down from an increase of 3.9 percent in July.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. In August, the 1-month rate of wage inflation was 3.3 percent, down from 4.0 percent in July. This slowdown in wage growth may be another indication of a weakening labor market. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

What effect might today’s jobs report have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) with respect to setting its target for the federal funds rate? One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As we’ve noted in earlier blog posts, since the weak July jobs report, investors have assigned a very high probability to the committee cutting its target by 0.25 percentage point (25 basis points) from its current range of 4.25 percent to 4.50 percent at its September 16–17 meeting. This morning, as the following figure shows, investors raised the probability they assign to a 50 basis point reduction at the September meeting from 0 percent to 14.2 percent. Investors are also now assigning a 78.4 percent probability to the committee cutting its target range by at least an additional 25 basis points at its October 28–29 meeting.

Unexpectedly Strong Jobs Report

Last September the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) cut its target for the federal funds rate by 0.50 percentage point (50 basis points. Many economists and policymakers expected the FOMC to continue cutting its federal funds rate target at meetings through 2025. (We discussed the September target cut in this blog post.) The FOMC cut its target by 25 basis points at both its November and December 2024 meetings. But by the December meeting, it had become clear that the inflation rate was not falling as quickly to the Fed’s 2 percent target as the committee members had hoped. As FOMC’s staff economists put it, there had been “upward surprises” in inflation data. According to the minutes of the December meeting, several members of the committee believed that “upside risks to the inflation outlook had increased.”

As a result, it seemed likely that the FOMC would leave its target for the federal funds rate unchanged at its next meeting on January 28-29. This conclusion was reinforced this morning (January 10) when the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for December. The report indicates that the labor market is stronger than expected.

Economists who had been surveyed by the Wall Street Journal had forecast that payroll employment, as reported in the establishment survey, would increase by 155,000. The BLS reported that payroll employment in December had increased by 256,000, well above expectations. The unemployment rate—which is calculated from data in the household survey—was 4.1 percent, down slightly from 4.2 percent in November. The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey for December also showed a strong increase of 478,000 jobs following a decline of 273,000 jobs in November. In any particular month, the story told by the two surveys can be inconsistent with employment increasing in one survey while falling in the other. But in December the two surveys were sending the same signal of rapid employment growth. (In this blog post, we discuss the differences between the employment estimates in the household survey and the employment estimates in the establishment survey.)

The employment-population ratio for prime age workers—those aged 25 to 54—also increased, as shown in the following figure, to 80.5 percent in December from 80.4 percent in November. Although the employment-population is below its recent high of 80.9 percent, it remains high relative to levels seen since 2001.

As the following figure shows, the unemployment rate, which is also reported in the household survey, decreased slightly to 4.1 percent in December from 4.2 percent in November. The unemployment rate has been remarkably stable over the past two years, varying only 0.2 percentage point above or below 4.0 percent.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.9 percent in December, down slightly from 4.0 percent in November.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. The December 1-month rate of wage inflation was 3.4 percent, a decline from the 4.9 percent rate in November. Whether measured as a 12-month increase or as a 1-month increase, AHE is still increasing somewhat more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

Given these data from the jobs report, it seems unlikely that the FOMC will reduce its target range for the federal funds rate at its next meeting. One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 97.3 percent to the FOMC keeping its target range for the federal funds rate unchanged at the current range of 4.25 percent to 4.50 percent, at its next meeting. Investors assign a probability of only 2.7 percent of the committee cutting its target range by 25 basis points at that meeting.

As the following figure shows, investors also expect the FOMC to keep its target range unchanged at its meeting on March 18-19, although there is greater uncertainty. Investors assign:

A 74.0 percent probability that the FOMC keeps its target range for the federal funds rate unchanged
A 25.4 percent probability that the committee cuts its target range by 25 basis points
A 0.6 percent probability that the committee cuts its target range by 50 basis points

A Slightly Better Than Expected Jobs Report

An image generated by GTP-4o of people going to work.

The Federal Reserve’s policymaking Federal Open Market Committee (FOMC) has its next meeting on December 17-18. Although the committee is expected to lower its target range for the federal funds rate at that meeting, some members of the committee have been concerned that inflation has remained above the committee’s 2 percent annual target. For instance, in an interview on December 4, Fed Chair Jerome Powell said: “Growth is definitely stronger than we thought, and inflation is coming a little higher. The good news is that we can afford to be a little more cautious as we try to find [the] neutral [federal funds rate].”

This morning (December 6), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for November. The report provided data indicating that the labor market remained strong—perhaps stronger than is consistent with the FOMC being willing to rapidly cut its federal funds rate target. The data in the October report (which we discussed in this blog post) were distorted by the effects of hurricanes and strikes. Today’s report indicated a bounce back in the labor market as many workers in areas affected by hurricanes returned to work and key strikes ended.

Economists who had been surveyed by the Wall Street Journal had forecast that payroll employment, as reported in the establishment survey, would increase by 214,000. The BLS reported that payroll employment in November had increased by 227,000, slightly above expectations. The unemployment rate—which is calculated from data in the household survey—was 4.2 percent, up slightly from 4.1 percent in October. In addition, the BLS revised upward its estimates of the employment increases in September and October by a total of 56,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey for November was a decline of 355,000 jobs following a decline of 368,000 jobs in October. So, the story told by the two surveys is somewhat at odds, with a solid employment gain in the establishment survey contrasted with a significant employment decline in the household survey. (In this blog post, we discuss the differences between the employment estimates in the household survey and the employment estimates in the establishment survey.)

The employment-population ratio for prime age workers—those aged 25 to 54—also declined, as shown in the following figure, to 80.4 percent in November from 80.6 percent in October. Although this was the second consecutive month of decline, the employment-population ratio remained high relative to levels seen since 2001.

As the following figure shows, the unemployment rate, which is also reported in the household survey, increased slightly to 4.2 percent in November from 4.1 percent in October. The unemployment is still below its recent high of 4.3 percent in July.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 4.0 percent in November, the same as in October.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic.
The November 1-month rate of wage inflation was 4.5 percent, a decline from the 5.2 percent rate in October. Whether measured as a 12-month increase or as a 1-month increase, AHE is still increasing more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

Given these data from the jobs report, is it likely that the FOMC will reduce its target range for the federal funds rate at its next meeting? One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 88.8 percent to the FOMC cutting its target range for the federal funds rate by 0.25 percentage point (25 basis points) from the current range of 4.50 percent to 4.75 percent, at its next meeting. Investors assign a probability of only 11.2 percent of the committee leaving its target range unchanged.

What do investors expect will happen at the next FOMC meeting after the December 17-18 meeting, which will occur on January 28-29, 2025? As of today, investors assing a probability of only 26.5 percent that the committee will set its target range at 4.00 percent to 4.25 percent, or 50 basis points, below the current target. In other words, only a minority of investors are expecting the committee to cut its target range at both its December and January meetings.

Weaker Than Expected Jobs Report Likely Due to the Effects of Hurricanes and Strikes

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The Bureau of Labor Statistics (BLS) releases the “Employment Situation” report (often called the “jobs report”) monthly. Economists and policymakers follow this report closely because it provides important insight into the current state of the U.S. economy. The October jobs report was released this morning, November 1 As sometimes happens, the data in the report were distorted by unusual events last month, primarily the effects of hurricanes and strikes. The BLS reported the results of its surveys without attempting to correct for these events. With respect to hurricanes, the BLS noted:

“No changes were made to either the establishment or household survey estimation procedures for the October data. It is likely that payroll employment estimates in some industries were affected by the hurricanes; however, it is not possible to quantify the net effect on the over-the-month change in national employment, hours, or earnings estimates because the establishment survey is not designed to isolate effects from extreme weather events. There was no discernible effect on the national unemployment rate from the household survey.”

Economists who participated in various surveys had forecast that payroll employment would increase by 117,500, with the unemployment rate—which is calculated from data in the household survey—being unchanged at 4.1 percent. The forecast of the unemployment rate was accurate, as the BLS reported a 4.1 percent unemployment rate in October. But the BLS reported that payroll employment had increased by only 12,000. In addition, the BLS revised downward its estimates of the employment increases in August and September by a total of 112,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.

What had initially seemed to be particularly strong growth in employment in September, possibly indicating a significant increase in the demand for labor, has been partially reversed by the data revision.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey for October was a decline of 368,000 jobs after an increase of 430,000 jobs in September. So, the story told by the two surveys was similar: significant weakening in the job market. But we need to keep in mind the important qualification that the job market in some areas of the country had been disrupted by unusual events during the month.

Other data in the jobs report told a more optimistic story of conditions in job market. The following figure shows the employment-population ratio for prime age workers—those aged 25 to 54. Although it declined from 80.9 percent to 80.6 percent, it remained high relative to levels seen since 2001.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post yesterday, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. AHE increased 4.0 percent in October, up from a 3.9 percent increase in September.

The October 1-month rate of wage inflation was 4.5 percent, an increase from the 3.8 percent rate in September. Whether measured as a 12-month increase or as a 1-month increase, AHE is increasing more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

The Federal Reserve’s policy-making Federal Open Market Committee (FOMC) has its next meeting on November 6-7. What effect will this jobs report likely have on the committee’s actions at that meeting? One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 99.8 percent to the FOMC cutting its target for the federal funds rate by 0.25 percentage point (25 basis points) at its next meeting. Investors see effectively no chance of the committee leaving its target range unchanged at the current 4.75 percent to 5.00 percent or of the committee cutting its target rate by 50 basis point cut.

Investors don’t appear to believe that the acceleration in wage growth indicated by today’s jobs report will cause the FOMC to pause its rate cutting. Nor do they appear to believe that the unexpectedly small increase in payroll employment will cause the committee to cut its target for the federal funds rate by 50 basis points.

Surprisingly Strong Jobs Report

The “Employment Situation” report (often referred to as the “jobs report”), released monthly by the Bureau of Labor Statistics (BLS), is always closely followed by economists and policymakers because it provides important insight in the current state of the U.S. economy. The jobs report for August, which was released in early September, showed signs that the labor market was cooling. The report played a role in the decision by the Fed’s policy-making Federal Open Market Committee to cut its target for the federal funds rate by 0.50 percentage point (50 basis points) at its meeting on September 17-18. A 0.25 percentage point (25 basis points) cut would have been more typical.

In a press conference following the meeting, Fed Chair Jerome Powell explained that one reason that the Fed’s policy-making Federal Open Market Committee (FOMC) cut its for the federal funds rate by 50 basis points rather than by 25 basis points was the state of the labor market: “In the labor market, conditions have continued to cool. Payroll job gains averaged 116,000 per month over the past three months, a notable step-down from the pace seen earlier in the year.”

The September jobs report released this morning (October 4) indicates that conditions in the labor market appear to have turned around. The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

Economists surveyed by the Wall Street Journal and by Bloomberg had forecast a net increase in payroll employment of 150,000 and an unchanged unemployment rate of 4.2 percent. The BLS reported a higher net increase of 250,000 jobs and a tick down of the unemployment rate to 4.1 percent. In addition, the BLS revised upward its estimates of the employment increases in July and August by a total of 72,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.

What had seemed from the BLS’s initial estimates to be slow growth in employment from April to June has been partly reversed by revisions. With the current estimates, employment has been increasing since July at a pace that should reduce any concerns that U.S. economy is on the brink of a recession.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey increased from 168,000 in August to 430,000 in September. So, in this case the direction of change in the two surveys was the same, with both showing strong increases in the net number of jobs created in September.

As the following figure shows, the unemployment rate, which is also reported in the household survey, decreased slightly for the second month in a row. It declined from 4.2 percent in August to 4.1 percent in September.

The household survey also provides data on the employment-population ratio. The following figure shows the employment-population ratio for prime age workers—those aged 25 to 54. It’s been unchanged since July at 80.9 percent, the higest level since 2001.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. AHE increased 4.0 percent in September, up from a 3.9 percent increase in August.

The 1-month rate of wage inflation of 4.5 percent in September is a decrease from the 5.6 percent rate in August. Whether measured as a 12-month increase or as a 1-month increase, AHE is increasing more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

What effect will this jobs report likely have on the FOMC’s actions at its final two meetings of the year on November 6-7 and December 17-18? Some investors were expecting that the FOMC would cut its target for the federal funds rate by 50 basis points at its next meeting, matching the cut at its September meeting. This jobs report makes it seem more likely that the FOMC will cut its target by 25 basis points.

One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 97.4 percent to the FOMC cutting its target for the federal funds rate by 25 basis points percentage point at its next meeting and a probability of 2.6 percent to the FOMC leaving its target unchanged at a range of 4.75 percent to 5.00 percent. Investors see effectively no chance of a 50 basis point cut at the next meeting.

Glenn Joins other Economists Who Have Served on the CEA in Calling for More Funding for the BLS

Image generated by GTP-4o of the U.S. Department of Labor building

The Census Bureau and the Bureau of Labor Statistics (BLS) jointly conduct the monthly Current Population Survey (CPS). As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), the BLS uses the data gathered by the CPS to calculate a number of important labor market statistics including the unemployment rate, the labor force participation rate, and the employment-population ratio.

Unfortunately, over the years Congress has not increased its appropriations for the BLS enough to cover the increasing costs of surveying 60,000 households each month. As a result, the BLS has announced that beginning in January 2025, it will be surveying fewer households in each month’s CPS.

Glenn has joined 120 other economists who have served over the years on the President’s Council of Economic Advisers (CEA) in writing a letter to Congress urging that the BLS be given sufficient funds to maintain the current size of the CPS sample and to begin steps to modernize the collection of the sample.

The letter notes that: “Reducing the CPS sample size will make its statistics less reliable…. will also hinder accurate analysis of states and local areas and subpopulations, including teenagers, seniors, veterans, people with disabilities, the self-employed, people who identify as Asian, Hispanic or Latino ethnicity, and Black or African Americans.”

The whole text of the letter can be read here.

Key Macro Data Series during the Time Since the Arrival of Covid–19 in the United States

A bookstore in New York City closed during Covid. (Photo from the New York Times)

Four years ago, in mid-March 2020, Covid–19 began to significantly affect the U.S. economy, with hospitalizations rising and many state and local governments closing schools and some businesses. In this blog post we review what’s happened to key macro variables during the past four years. Each monthly series starts in February 2020 and the quarterly series start in the fourth quarter of 2019.

Production

Real GDP declined by 5.8 percent from the fourth quarter of 2019 to the first quarter of 2020 and by an additional 28.0 percent from the first quarter of 2020 to the second quarter. This decline was by far the largest in such a short period in the history of the United States. From the second quarter to the third quarter of 2020, as businesses began to reopen, real GDP increased by 34.8 percent, which was by far the largest increase in a single quarter in U.S. history.

Industrial production followed a similar—although less dramatic—path to real GDP, declining by 16.8 percent from February 2020 to April 2020 before increasing by 12.3 percent from April 2020 to June 2020. Industrial production did not regain its February 2020 level until March 2022. The swings in industrial production were smaller than the swings in GDP because industrial production doesn’t include the output of the service sector, which includes firms like restaurants, movie theaters, and gyms that were largely shutdown in some areas. (Industrial production measures the real output of the U.S. manufacturing, mining, and electric and gas utilities industries. The data are issued by the Federal Reserve and discussed here.)

Employment

Nonfarm payroll employment, collected by the Bureau of Labor Statistics (BLS) in its establishment survey, followed a path very similar to the path of production. Between February and April 2020, employment declined by an astouding 22 million workers, or by 14.4 percent. This decline was by far the largest in U.S. history over such a short period. Employment increased rapidly beginning in April but didn’t regain its February 2020 level until June 2022.

The employment-population ratio measures the percentage of the working-age population that is employed. It provides a more comprehensive measure of an economy’s utilization of available labor than does the total number of people employed. In the following figure, the blue line shows the employment-population ratio for the whole working-age population and the red line shows the employment-population ratio for “prime age workers,” those aged 25 to 54.

For both groups, the employment-population ratio plunged as a result of Covid and then slowly recovered as the production began increasing after April 2020. The employment-population ratio for prime age workers didn’t regain its February 2020 value until February 2023, an indication of how long it took the labor market to fully overcome the effects of the pandemic. As of February 2024, the employment-population ratio for all people of working age hasn’t returned to its February 2020 value, largely because of the aging of the U.S. population.

Average weekly hours worked followed an unusual pattern, declining during March 2020 but then increasing to beyond its February 2020 level to a peak in April 2021. This increase reflects firms attempting to deal with a shortage of workers by increasing the hours of those people they were able to hire. By April 2023, average weekly hours worked had returned to its February 2020 level.

Income

Real average hourly earnings surged by more than six percent between February and April 2020—a very large increase over a two-month period. But some of the increase represented a composition effect—as workers with lower incomes in services industries such as restaurants were more likely to be out of work during this period—rather than an actual increase in the real wages received by people employed during both months. (Real average hourly earnings are calculated by dividing nominal average hourly earnings by the consumer price index (CPI) and multiplying by 100.)

Median weekly real earnings, because it is calculated as a median rather than as an average (or mean), is less subject to composition effects than is real average hourly earnings. Median weekly real earnings increased sharply between February and April of 2020 before declining through June 2022. Earnings then gradually increased. In February 2024 they were 2.5 percent higher than in February 2020.

Inflation

The inflation rate most commonly mentioned in media reports is the percentage change in the CPI from the same month in the previous year. The following figure shows that inflation declined from February to May 2020. Inflation then began to rise slowly before rising rapidly beginning in the spring of 2021, reaching a peak in June 2022 at 9.0 percent. That inflation rate was the highest since November 1981. Inflation then declined steadily through June 2023. Since that time it has fluctuated while remaining above 3 percent.

As we discuss in Macroeconomics, Chapter 15, Section 15.5 (Economics, Chapter 25, Section 25.5), the Federal Reserve gauges its success in meeting its goal of an inflation rate of 2 percent using the personal consumption expenditures (PCE) price index. The following figure shows that PCE inflation followed roughly the same path as CPI inflation, although it reached a lower peak and had declined below 3 percent by November 2023. (A more detailed discussion of recent inflation data can be found in this post and in this post.)

Monetary Policy

The following figure shows the effective federal funds rate, which is the rate—nearly always within the upper and lower bounds of the Fed’s target range—that prevails during a particular period in the federal funds market. In March 2020, the Fed cut its target range to 0 to 0.25 percent in response to the economic disruptions caused by the pandemic. It kept the target unchanged until March 2022 despite the sharp increase in inflation that had begun a year earlier. The members of the Federal Reserve’s Federal Open Market Committee (FOMC) had initially hoped that the surge in inflation was largely caused by disuptions to supply chains and would be transitory, falling as supply chains returned to normal. Beginning in March 2022, the FOMC rapidly increased its target range in response to continuing high rates of inflation. The targer range reached 5.25 to 5.50 percent in July 2023 where it has remained through March 2024.

Although the money supply is no longer the focus of monetary policy, some economists have noted that the rate of growth in the M2 measure of the money supply increased very rapidly just before the inflation rate began to accelerate in the spring of 2021 and then declined—eventually becoming negative—during the period in which the inflation rate declined.

As we discuss in the new 9th edition of Macroeconomics, Chapter 15, Section 15.5 (Economics, Chapter 25, Section 25.5), some economists believe that the FOMC should engage in nominal GDP targeting. They argue that this approach has the best chance of stabilizing the growth rate of real GDP while keeping the inflation rate close to the Fed’s 2 percent target. The following figure shows the economy experienced very high rates of inflation during the period when nominal GDP was increasing at an annual rate of greater than 10 percent and that inflation declined as the rate of nominal GDP growth declined toward 5 percent, which is closer to the growth rates seen during the 2000s. (This figure begins in the first quarter of 2000 to put the high growth rates in nominal GDP of 2021 and 2022 in context.)

Fiscal Policy

As we discuss in the new 9th edition of Macroeconomics, Chapter 15 (Economics, Chapter 25), in response to the Covid pandemic Congress and Presidents Trump and Biden implemented the largest discretionary fiscal policy actions in U.S. history. The resulting increases in spending are reflected in the two spikes in federal government expenditures shown in the following figure.

The initial fiscal policy actions resulted in an extraordinary increase in federal expenditures of $3.69 trillion, or 81.3 percent, from the first quarter to the second quarter of 2020. This was followed by an increase in federal expenditures of $2.31 trillion, or 39.4 percent, from the fourth quarter of 2020 to the first quarter of 2021. As we recount in the text, there was a lively debate among economists about whether these increases in spending were necessary to offest the negative economic effects of the pandemic or whether they were greater than what was needed and contributed substantially to the sharp increase in inflation that began in the spring of 2021.

Saving

As a result of the fiscal policy actions of 2020 and 2021, many households received checks from the federal government. In total, the federal government distributed about $80o billion directly to households. As the figure shows, one result was to markedly increase the personal saving rate—measured as personal saving as a percentage of disposable personal income—from 6.4 percent in December 2019 to 22.0 in April 2020. (The figure begins in January 2020 to put the size of the spike in the saving rate in perspective.)

The rise in the saving rate helped households maintain high levels of consumption spending, particularly on consumer durables such as automobiles. The first of the following figure shows real personal consumption expenditures and the second figure shows real personal consumption expenditures on durable goods.

Taken together, these data provide an overview of the momentous macroeconomic events of the past four years.

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.

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.