Welcome to the first podcast for the Fall 2024 semester from the Hubbard/O’Brien Economics author team. Check back for Blog updates & future podcasts which will happen every few weeks throughout the semester.
Join authors Glenn Hubbard & Tony O’Brien as they provide an update on the Macroeconomy. They offer thoughts on the likelihood of a soft landing and whether the actions of the Federal Reserve helped or hindered that process. The monetary and fiscal challenges facing the new administration are real and the Fed will begin its process of rate-cutting this week in the upcoming FOMC meeting. Gain insight into this evolving situation by listening to this podcast. Click HERE to access the podcast.
Today (September 11), the Bureau of Labor Statistics (BLS) released its monthly report on the consumer price index (CPI). This report is the last one that will be released before the Fed’s policy-making Federal Open Market Committee (FOMC) holds its next meeting on September 17-18.
As the following figure shows, the inflation rate for August measured by the percentage change in the CPI from the same month in the previous month—headline inflation (the blue line)—was 2.6 percent down from 2.9 percent in July. Core inflation (the red line)—which excludes the prices of food and energy—increased slightly to 3.3 percent in August from 3.2 percent in July. Headline inflation was slightly below what economists surveyed by the Wall Street Journal had expected, while core inflation was slightly higher.
As the following figure shows, if we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—we see that both headline and core inflation increased. Headline inflation (the blue line) increased from 1.8 percent in July to 2.3 percent in August. Core inflation (the red line) jumped from 2.0 percent in July to 3.4 percent in August. Overall, we can say that, taking 1-month and 12 month inflation together, the U.S. economy may still be on course for a soft landing—with the annual inflation rate returning to the Fed’s 2 percent target without the economy being pushed into a recession—but the increase in 1-month inflation is concerning. Of course, as always, it’s important not to overinterpret the data from a single month. (Note, also, that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI in evaluating whether it is hitting its 2 percent inflation target.)
As we’ve discussed in previous blog posts, Federal Reserve Chair Jerome Powell and his colleagues on the FOMC have been closely following inflation in the price of shelter. The price of “shelter” in the CPI, as explained here, includes both rent paid for an apartment or house and “owners’ equivalent rent of residences (OER),” which is an estimate of what a house (or apartment) would rent for if the owner were renting it out. OER is included to account for the value of the services an owner receives from living in an apartment or house.
As the following figure shows, inflation in the price of shelter has been a significant contributor to headline inflation. The blue line shows 12-month inflation in shelter and the red line shows 1-month inflation in shelter. Twelve-month inflation in shelter reversed the decline that began in the spring of 2023, rising from 5.0 percent in July to 5.2 percent August. One-month inflation in shelter—which is much more volatile than 12-month inflation in shelter—increased from 4.6 percent in July to 5.2 percent in August, continuing an increase that began in June. The increase in 1-month inflation in shelter may concern the members of the FOMC, as may, to a lesser extent, the increase in 12-month inflation in shelter. Shelter has a smaller weight of 15 percent in the PCE price index that the Fed uses to gauge whether it is hitting its 2 percent inflation target in contrast with the 33 percent weight that shelter has in the CPI. But persistent shelter inflation in the 5 percent range would make a soft landing more difficult.
Finally, in order to get a better estimate of the underlying trend in inflation, some economists look at median inflation and trimmed mean inflation. Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates. Trimmed mean inflation drops the 8 percent of good and services with the higherst inflation rates and the 8 percent of goods and services with the lowest inflation rates.
As the following figure (from the Federal Reserve Bank of Cleveland) shows, median inflation (the orange line) declined slightly from 4.3 percent in July to 4.2 percent in August. Trimmed mean inflation (the blue line) also declined slightly from 3.3 in July to 3.2 percent in August. These data provide confirmation that core CPI inflation is likely running higher than a rate that would be consistent with the Fed achieving its inflation target.
For the past few weeks Fed officials have been indicating that the FOMC is likely to cut its target for the federal funds at its next meeting on Septembe 17-18. Investors who buy and sell federal funds futures contracts expect that the FOMC will cut its target for the federal funds rate by 0.25 percentage point from the current range of 5.50 percent to 5.25 percent. (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 85.0 percent to the FOMC cutting its target for the federal funds rate by 0.25 percentage point at its next meeting and a probability of only 15.0 percent that the cut will be 0.50 percentage point.
The FOMC has to balance the risk of leaving its target for the federal funds rate at its current level for too long—increasing the risk of slowing demand so much that the economy slips into recession—against the risk of cutting its target too soon—increasing the risk that inflation persists above the Fed’s 2 percent target. We’ll see at the committee’s next meeting how Fed Chair Jerome Powell and the other members assess the current state of the economy as they consider when and by how much to cut their target for the federal funds rate.
The “Employment Situation” report (often referred to as the “jobs report”), which is 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. This month’s report is considered particularly important because last month’s report indicated that the labor market might be weaker than most economists had believed. As we discussed in a recent blog post, late last month Fed Chair Jerome Powell signaled that the Fed’s policy-making Federal Open Market Committee (FOMC) was likely to cut its target for the federal funds rate at its next meeting on September 17-18.
Economists and investment analysts had speculated that following August’s unexpectedly weak jobs report, another weak report might lead the FOMC to cut its federal funds target by 0.50 percentage rate rather than by the more typical 0.25 percent point. The jobs report the BLS released this morning (September 6) was mixed, showing a somewhat lower than expected increase in employment as measured by the establishment survey, but higher wage growth.
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.)
According to the establishment survey, there was a net increase of 142,000 jobs during August. This increase was below the increase of 161,000 that economists had forecast in a survey by the Wall Street Journal. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past two years. The BLS revised lower its estimates of the net increase in jobs during June and July by a total of 86,000. (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 BLS’s estimate of average monthly job growth during the last three months is now 116,000, a significant decline from an average of 211,000 per month during the previous three months and 251,000 per month during 2023.
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 in the establishment survey. The net change in jobs as measured by the household survey increased from 67,000 in July to 168,000 in August. So, in this case the direction of change in the two surveys was the same—an increase in the net number of jobs created in August compared with July.
As the following figure shows, the unemployment rate, which is also reported in the household survey, decreased from 4.3 percent to 4.2 percent—breaking what had been a five month string of unemployment rate increases.
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 3.8 percent in August, up from a 3.6 percent increase 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 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 1-month rate of wage inflation of 4.9 percent in August is a significant increase from the 2.8 percent rate in July, although it’s unclear whether the increase represented renewed upward wage pressure in the labor market or reflected the greater volatility in wage inflation when calculated this way.
What effect is this jobs report likely to have on the FOMC’s actions at its September meeting? One indication 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 73.0 percent to the FOMC cutting its target for the federal funds rate by 0.25 percentage point at its next meeting and a probability of only 27.0 percent that the cut will be 0.50 percentage point. In contrast, after the last jobs report was interpreted to indicate a dramatic slowing of the economy, investors assigned a probability of 79.5 percent to a 0.50 cut in the federal funds rate target.
It seems most likely following today’s mixed job report that the FOMC will cut its target for the federal funds rate by 0.25 percent point from the current target range of 5.25 percent to 5.50 percent to a range of 5.00 percent to 5.25 percent. The report doesn’t indicate the significant weakening in the labor market that was probably needed to push the committee to cutting its target by 0.50 percent point.
Image generated by GTP-4o “illustrating the concept of federal economic statistics.”
Government economic statistics help guide the actions of policymakers, firms, households, workers, and investors. As a recent report from the American Statistical Association expressed it:
“Official statistics from the federal government are a critically important source of needed information in the United States for policymakers and the public, providing information that meets the highest professional standards of relevance, accuracy, timeliness, credibility, and objectivity.”
Government agencies consider some of these statistics to be of particular importance. The Office of Management and Budget (OMB) has designated 36 data series as being principal federal economic indicators (PFEIs). Many of these are key macroeconomic data series, such as the consumer price index (CPI), gross domestic product (GDP), and unemployment. Others, such as housing vacancies and natural gas storage, are less familiar although important in assessing conditions in specific sectors of the economy.
Since 1985, the preparation and release of PFEIs has been governed by OMB Statistical Policy Directive No. 3. Among other things, Directive No. 3 is intended to ‘‘preserve the distinction between the policy-neutral release of data by statistical agencies and their interpretation by policy officials.’’ Although some politicians and commentators claim otherwise, federal government statistical agencies, such as the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA), are largely staffed by career government employees whose sole objective is to gather and release the most accurate data possible with the funds that Congress allocates to them.
Directive No. 3 also requires the statistical agencies to act so as to ‘‘prevent early access to information that may affect financial and commodity markets.’’ Unfortunately, several times recently the BLS has been subject to criticism for releasing data early or releasing data to financial firms before the official public release of the data. For instance, on August 21, 2o24 the BLS was scheduled to release at 10:00 a.m. its annual benchmark revision of employment estimates from the establishment survey. (We discuss this release in this blog post.) Because of technical problems, the public release was delayed until 10:30. During that half hour, analysts at some financial firms called the BLS and were given the data over the phone. Doing so was contraty to Directive No. 3 because the employment data are a PFEI, which obliges the BLS to take special care that the data aren’t made available to anyone before their public release.
The New York Times filed a Freedom of Information Act (FOIA) request with the BLS in order to investigate the cause of several instances of the agency releasing data early. In an article summarizing the information the paper received as a result of its FOIA request, the reporters concluded that “the information [the BLS] has provided [about the reasons for the early data releases] has at times proved inaccurate or incomplete.” The BLS has pledged to take steps to ensure that in the future it will comply fully with Directive No. 3.
In a report discussing the difficulties federal agencies statistical have in meeting their obligations responsibilities, the American Statistical Association singled out two problems: the declining reponse rate to surveys—particularly notable with respect to the establishment employment survey—and tight budget constraints, which are hampering the ability of some agencies to hire the staff and to obtain the other resources necessary to collect and report data in an accurate and timely manner.
The result when asking GTP-4o to generate “an image illustrating inflation.”
Inflation, as measured by changes in the personal consumption expenditures (PCE) price index, continued a slow decline that began in March. (The Fed uses annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.) On August 30, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for July, which contains monthly PCE data.
The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the percentage change in the PCE from the same month in the previous year. Measured this way, in July PCE inflation (the blue line) was 2.5 percent, the same as in June. Core PCE inflation (the red line) in July was 2.6 percent, which was also unchanged from June.
The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation rose in July to 1.7 percent from 0.7 percent in July—although higher in July, inflation was below the Fed’s 2 percent target in both months. Core PCE inflation was 2.0 percent in July, which was unchanged from June. These data indicate that inflation has been at or below the Fed’s target for the last three months.
The following figure shows another way of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above), inflation measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the red line). Fed Chair Jerome Powell and other members of the Federal Open Market Committee (FOMC) have said that they are concerned by the persistence of elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.
Inflation using the trimmed mean measure was 2.7 percent in July (calculated as a 12-month inflation rate), down only slightly from 2.8 percent in June—and still above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in July at 3.7 percent, although down from 3.9 percent in June.
On balance, taking together these various measures, inflation seems on track to return to the Fed’s 2 percent target. As we noted in this earlier post, last week in a speech at the Federal Reserve Bank of Atlanta’s monetary policy symposium in Jackson Hole, Wyoming , Fed Chair Jerome Powell all but confirmed that the the Fed’s policy-maiking Federal Open Market Committee (FOMC) will cut its target for the federal funds rate at its next meeting on September 17-18. There was nothing in this latest PCE report to reduce the likelihood of the FOMC cutting its target at that meeting by an expected 0.25 percent point from a range of 5.25 percent to 5.50 percent to a range of 5.00 percent to 5.25 percent. There also is nothing in the report that would increase likelihood that the committee will cut its target by 0.50 percentage point, as many investors expected following the weak employment report released by the Bureau of labor Statistics (BLS) at the beginning of August. (We discuss this report and the reaction among investors in this post.)
Glenn discusses Fed policy, the state of the U.S economy, economic growth, China in the world economy, industrial policy, protectionism, and other topics in this episode of the Political Economy podcast from the American Enterprise Institute.
Photo of Federal Reserve Chair Jerome Powell from federalreserve.gov
Federal Reserve chairs often take the opportunity of the Kansas City Fed’s annual monetary policy symposium held in Jackson Hole, Wyoming to provide a summary of their views on monetary policy and on the state of the economy. In speeches, Fed chairs are careful not to preempt decisions of the Federal Open Market Committee (FOMC) by stating that policy changes will occur that the committee hasn’t yet agreed to. In his speech at Jackson Hole on Friday (August 23), Powell came about as close as Fed chairs ever do to announcing a policy change in a speech.
In the speech, Powell indicated that: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” The statement is effectively an announcement that the FOMC will reduce its target for the federal funds rate at its next meeting on September 17-18. By referring to “the timing and pace of rate cuts,” Powell was indicating that the FOMC was likely to eventually reduce its target for the federal funds rate well below its current 5.25 percent to 5.50 percent, although the reductions will be spread out over a number of meetings.
The minutes of the FOMC’s last meeting on July 30-31 were released on August 21. The minutes stated that: “The vast majority [of committee members] observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.” The apparent consensus at the July meeting that the target for the federal funds rate should be reduced at the September meeting was likely the key reason why Powell was so forthright in his speech.
In his speech, Powell summarized his views on the reasons that inflation accelerated in 2021 and why it has slowly declined since reaching a peak in the summer of 2022:
“[The analysis of events that Powell supports] attributes much of the increase in inflation to an extraordinary collision between overheated and temporarily distorted demand and constrained supply. While researchers differ in their approaches and, to some extent, in their conclusions, a consensus seems to be emerging, which I see as attributing most of the rise in inflation to this collision. All told, the healing from pandemic distortions, our efforts to moderate aggregate demand, and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to our 2 percent objective.”
As he has over the past three years, Powell emphasized the importance of expectations having remained “anchored,” meaning that households and firms continued to expect that the annual inflation rate would return to 2 percent, even when the current inflation rose far above that rate. We discuss how expectations of inflation affect the current inflation rate in Macroeconomics, Chapter 17 (Economics, Chapter 27).
Image of “people attending a job fair” generated by GTP-4o
On Wednesday, August 21, the Bureau of Labor Statistics (BLS) issued revised estimates of the increase in employment, as measured by the establishment survey, over the period from April 2023 through March 2024. The BLS had initially estimated that on average during that period net employment had increased by 242,000 jobs per month. The revision lowered this estimate by 28 percent to an average of only 174,000 net new jobs created per month. The difference between those two monthly averages means that the U.S. economy had generated a total of 818,000 fewer jobs during that period.
Why does the BLS have to revise its employment estimates? As we discuss in Macroeonomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1) the initial estimates that the BLS issues each month in its “Employment Situation” reports are based on a sample of 300,000 establishments. The monthly data also rely on estimates of the number of employees at establishments that opened or closed during the month and on employment changes at establishments that failed to respond to the survey. In August of each year, the BLS issues revised employment estimates based on state unemployment insurance tax records, which are much more comprehensive than the original sample of establishments because nearly all employers are included.
Although this year’s revision is particularly large in absolute terms—the largest since 2009—it still represents only about 0.5 percent of the more than 158 million people employed in the U.S. economy. How will this revision affect the decision by the Federal Open Market Committee (FOMC) at its next meeting on September 17-18 to cut or maintain its target for the federal funds rate? The members of the committee were probably not surprised by the downward revision in the employment estimates, although they may have anticipated that the revision would be smaller. In five of the past six years, the BLS has revised its estimates of payroll employment downward in its annual benchmark revision.
In his press conference following the June 12 FOMC meeting, Fed Chair Jerome Powell observed that “you have payroll jobs still coming in strong, even though, you know, there’s an argument that they may be a bit overstated.” (Note that FOMC members don’t receive the data in BLS reports until the reports are publicly released.) As we noted in this recent post, even before the BLS revised its employment estimates downward, recent monthly increases were below the level likely needed to keep up with population growth—so-called breakeven employment growth. There was already a high likelihood that the FOMC intended to cut its target for the federal funds rate at its September meeting. The substantial downward revision in the employment data makes a cut nearly a certainty.
Chair Powell is scheduled to give a speech on Friday morning at the Kansas City Fed’s annual monetary policy symposium held in Jackson Hole, Wyoming. During that speech, he’s likely to give his reaction to the revised employment data—and the state of the labor market more generally.
Today (August 14), the Bureau of Labor Statistics (BLS) released its monthly report on the consumer price index (CPI), which showed inflation falling below 3 percent for the first time since March 2021.
As the following figure shows, the inflation rate for July measured by the percentage change in the CPI from the same month in the previous month—headline inflation (the blue line)—was 2.9 percent down from 3.0 percent in June. Core inflation (the red line)—which excludes the prices of food and energy—was 3.2 percent in July, down from 3.3 percent in June.
As the following figure shows, if we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—we see an increase in the inflation rate in July, but the increase is from the very low levels in June. Headline inflation (the blue line) increased from –0.7 percent in June (which means that consumer price actually fell that month) to 1.9 percent in July. Core inflation (the red line) increased from 0.8 percent in June to 2.o percent in July. Overall, we can say that, taking 1-month and 12 month inflation together, the U.S. economy seems on course for a soft landing—with the annual inflation rate returning to the Fed’s 2 percent target without the economy being pushed into a recession. (Note, though, that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI in evaluating whether it is hitting its 2 percent inflation target.)
Federal Reserve Chair Jerome Powell and his colleagues on the policy-making Federal Open Market Committee (FOMC) have been closely following inflation in the price of shelter. The price of “shelter” in the CPI, as explained here, includes both rent paid for an apartment or house and “owners’ equivalent rent of residences (OER),” which is an estimate of what a house (or apartment) would rent for if the owner were renting it out. OER is included to account for the value of the services an owner receives from living in an apartment or house.
As the following figure shows, inflation in the price of shelter has been a significant contributor to headline inflation. The blue line shows 12-month inflation in shelter and the red line shows 1-month inflation in shelter. Twelve-month inflation in shelter continued its decline that began in the spring of 2023, falling from 5.1 percent in June to 5.0 percent July. One-month inflation in shelter—which is much more volatile than 12-month inflation in shelter—increased from 2.1 percent in June to 4.6 percent in July. The value for 1-month inflation in shelter may concern the members of the FOMC, but the continuing decline in in the less volatile 12-month inflation in shelter provides some reassurance that inflation in shelter is likely continuing to decline.
Finally, in order to get a better estimate of the underlying trend in inflation, some economists look at median inflation and trimmed mean inflation. Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates. Trimmed mean inflation drops the 8 percent of good and services with the higherst inflation rates and the 8 percent of goods and services with the lowest inflation rates.
As the following figure (from the Federal Reserve Bank of Cleveland) shows, median inflation (the brown line) ticked up slightly from 4.2 percent in June to 4.3 percent in July. Trimmed mean inflation (the blue line) was unchanged in July at 3.3 percent. One conclusion from these data is that headline and core inflation may be somewhat understating the underlying rate of inflation.
For the past few weeks investores in financial markets have been expecting that recent inflation and employment data will lead the FOMC to cut its target for the federal funds at its next meeting on Septembe 17-18 .
Futures markets allow investors to buy and sell futures contracts on commodities–such as wheat and oil–and on financial assets. Investors can use futures contracts both to hedge against risk—such as a sudden increase in oil prices or in interest rates—and to speculate by, in effect, betting on whether the price of a commodity or financial asset is likely to rise or fall. (We discuss the mechanics of futures markets in Chapter 7, Section 7.3 of Money, Banking, and the Financial System.) The CME Group was formed from several futures markets, including the Chicago Mercantile Exchange, and allows investors to trade federal funds futures contracts. The data that result from trading on the CME indicate what investors in financial markets expect future values of the federal funds rate to be. The following chart from the CME’s FedWatch Tool shows the current values from trading of federal funds futures.
The probabilities in the chart reflect investors’ predictions of what the FOMC’s target for the federal funds rate will be after the committee’s September meeting. The chart indicates that investors assign a probability of 35.5 percent to the FOMC cutting its target range for the federal funds rate by 0.50 percentage point from the current 5.25 prcent to 5.50 percent to 4.75 percent to 5.25 percent. Investors assign a much larger probability—64.5 percent—to the FOMC cutting its target range for the federal funds rate by 0.25 percentage point to 5.00 percent to 5.25 percent.
It would most likely require the next BLS “Employment Situation” report—which is scheduled for release on September 6—to show unexpected weakness for the FOMC to cut its target for the federal funds rate by more than 0.25 percentage point.
Earlier this week, as we discussed in this blog post, the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) voted to leave its target for the federal funds rate unchanged. In his press conference following the meeting, Fed Chair Jerome Powell stated that: “Overall, a broad set of indicators suggests that conditions in the labor market have returned to about where they stood on the eve of the pandemic—strong but not overheated.”
This morning (August 2), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often referred to as the “jobs report”) for July, which indicates that the labor market may be weaker than Powell and the other members of the FOMC believed it to be when they decided to leave their target for the federal funds rate unchanged.
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.)
According to the establishment survey, there was a net increase of 114,000 jobs during July. This increase was below the increase of 175,000 to 185,000 that economists had forecast in surveys by the Wall Street Journal and bloomberg.com. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past two years.
The previously reported increases in employment for April and May were revised downward by 29,000 jobs. (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.”) As we’ve discussed in previous posts (most recently here), downward revisions to the payroll employment estimates are particularly likely at the beginning of a recession, although this month’s adjustments were relatively small.
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 in the establishment survey. The net change in jobs as measured by the household survey declined from 116,000 in June to 67,000 in June. So, in this case the direction of change in the two surveys was the same—a decline in the increase in the number of jobs.
As the following figure shows, the unemployment rate, which is also reported in the household survey, increased from 4.1 percent to 4.3 percent—the highest unemployment rate since October 2021. Although still low by historical standards, July was the fifth consecutive month in which the unemployment rate increased. It is also higher than the unemployment rate just before the pandemic. The unemployment rate was below 4 percent most months from mid-2018 to early 2020.
Some economists and policymakers have been following the Sahm rule, named after Claudia Sahm Chief Economist for New Century Advisors and a former Fed economist. The Sahm rule, as stated on the site of the Federal Reserve Bank of St. Louis is: “Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3 [measure]) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.” The following figure shows the values of this indicator dating back to March 1949.
So, according to this indicator, the U.S. economy is now at the start of a recession. Does that mean that a recession has actually started? Not necessarily. As Sahm stated in an interview this morning, her indicator is a historical relationship that may not always hold, particularly given how signficantly the labor market has been affected during the last four years by the pandemic.
As we noted in a post earlier this week, investors who buy and sell federal funds futures contracts assigned a probability of 11 percent that the FOMC would cut its target for the federal funds rate by 0.50 percentage point at its next meeting. (Investors in this market assigned a probability of 89 percent that the FOMC would cut its target by o.25 percentage point.) Today, investors dramatically increased the probability to 79.5 percent of a 0.50 cut in the federal funds rate target, as shown in this figure from the CME site.
Investors on the stock market appear to believe that the probability of a recession beginning before the end of the year has increased, as indicated by sharp declines today in the stock market indexes.
The next scheduled FOMC meeting isn’t until September 17-18. The FOMC is free to meet in between scheduled meetings but doing so might be interpreted as meanng that economy is in crisis, which is a message the committee is unlikely to want to send. It would likely take additional unfavorable reports on macro data for the FOMC not to wait until September to take action on cutting its target for the federal funds rate.
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