Source: Jin10 Data

Famous journalist Nick Timiraos, also known as the 'new Fed news agency', updated after a two-week hiatus over the weekend. Although the PCE report was just released last Friday, the content of the article did not interpret inflation data as usual, but analyzed the labor market. He warned that even if the labor market cools slowly, it often leads to an economic downturn. Combined with the release of June nonfarm payroll data this week and Fed Chairman Powell's speech, this may be some kind of hint. The full text is as follows.

The COVID-19 pandemic has caused serious overheating of the US labor market. Companies resuming work are panicked due to labor shortages and are recruiting heavily. As prices soar, people's concerns about wage-price spirals intensify.

However, the labor market has recently cooled down and actually appears to be close to normal levels. The unemployment rate has risen from a half-century low of 3.4% a year ago to 4% in May, consistent with economists' view of full employment. Data for June will be released on Friday.

The question now is whether the labor market is in a sustainable balance and whether the unemployment rate is stable at around 4% or continues to soften, leading to economic recession. Historically, when the rise in the unemployment rate far exceeds the current level, an economic downturn occurs.

Ernie Tedeschi, a former economic advisor to the Biden administration and current budget laboratory at Yale University, said, 'This is what the economy looks like when it is in a sustainable development state, but because our economy rarely has time to approach or achieve full employment status in history, there is a lot of uncertainty.'

For the Fed, whether the labor market is balanced or deteriorating is crucial to the answer to this question. According to the Fed's preferred indicators, the inflation rate fell to 2.6% in May, down from 4% a year ago, but still higher than the 2% target. As the lagging effect of the previous rise in housing costs gradually weakens, the inflation rate should further decline, but it is not absolute. Fed officials said they could gradually lower interest rates as long as the labor market remains healthy.

On the other hand, there are signs that consumer spending has slowed down. If the labor market continues to relax, this process may be difficult to stop once it starts, which would be conducive to faster interest rate cuts.

Jonathan Pingle, chief US economist at UBS, said: 'They are focusing on the slowdown in employment growth. At some point, you would want to stop it from slowing down further.'

The vacancy rate is approaching a critical level.

Although it is rare for the labor market to cool down without an economic recession, when Fed officials began to raise interest rates at the fastest pace in decades two years ago to fight high inflation, they actually believed that this situation was possible.

Several Fed officials have said that the labor market is severely imbalanced and that employers may respond to higher rates by filling vacancies rather than layoffs.

That's how it is so far. In March 2022, when the Fed began to raise interest rates, each unemployed worker corresponded to two job openings, a record high. By April, this ratio had dropped to 1.2, or the pre-epidemic level. This is almost entirely due to the decrease in job vacancies rather than the increase in the unemployment rate. Wage growth and inflation have slowed simultaneously.

The Fed's analysis predicts this relatively harmless inflation slowdown, but also warns that it may become painful at some point. The analysis said that once the vacancy rate drops below 4.5%, the unemployment rate may begin to rise sharply. The vacancy rate in April this year was 4.8%, lower than 7.4% in March 2022.

Fed Governor Waller said in January, 'We don't think this can go on forever.'

The US recruitment rate and resignation rate have returned to levels 10 and 7 years ago, respectively, indicating that fewer and fewer people think they have the opportunity to jump to new, higher-paying jobs. However, the layoff rate is still low, meaning that employers are not trying to lay off employees.

This makes the number of initial jobless claims the best early warning signal of an economic recession. The number of initial jobless claims has risen slightly in recent weeks, but is still lower than the same period last year. If it continues to rise, the reason for interest rate cuts may appear soon.

Does confidence in the economy support corporate recruitment enthusiasm?

Some people say that worries about an economic slowdown are unnecessary because the uncertainty that comes with rising interest rates has dissipated. Concerns about an economic recession led employers to reduce recruitment and investment, but recent surveys show that they are more confident about future income, which could support recruitment.

Julia Pollak, chief economist at online employment market ZipRecruiter, said, 'The labor market is coming out of the storm, and employers can finally take a breath and consider long-term development from a strategic perspective. In comparison with 2023, they were in a protective waiting state, very worried about excessive recruitment before a potential economic recession.'

Nevertheless, Goldman Sachs economists still see signs of weakness. The proportion of newcomers to the labor market who find jobs is low. Permanent (rather than temporary) layoffs are increasing.

According to a company report, their clients are less actively seeking employees compared to a year ago. Julia Coronado, founder of economic consulting firm MacroPolicy Perspectives, said: 'Recruiting processes were more proactive a year ago.'

The non-farm payroll report released mixed signals.

The Department of Labor's monthly employment report is based on two surveys that currently provide conflicting information. The department's employer-based employment survey (institutional survey) shows that employment has increased by 2.8 million in the past year, with an increase of 248,000 jobs per month this year. The second survey is a household survey used to calculate the unemployment rate, and it shows that employment has increased by 216,000 in the past year with the same definition of employment. The institutional survey may overestimate job growth by overestimating jobs created by new businesses and underestimating jobs lost due to corporate closures. Using state-level data, including the number of people applying for unemployment benefits, Pingle said that the number of new jobs created each month in the past year may be close to 200,000. However, the household survey may underestimate employment if immigration increases are not properly taken into account.

Actual employment growth may lie between these two indicators. While this may mean that employment growth can prevent the unemployment rate from rising to crisis levels, it is not as encouraging as it seems. Tedski pointed out that due to increased immigration, it may be necessary to add 300,000 jobs per month to maintain a stable unemployment rate.

Historically, once the unemployment rate has risen half a percentage point from its recent low over the past year, it will continue to rise significantly and the economy will enter a recession. This surge typically initially focuses on industries such as manufacturing and construction that are particularly sensitive to business cycles and interest rates. However, Goldman Sachs said that the recent rise in the unemployment rate is widespread across all industries and may reflect an over-hiring situation after the COVID-19 pandemic in 2022.

In the past, once the unemployment rate has risen half a percentage point from its recent low over the past year, it will continue to rise significantly and the economy will enter a recession.

This surge typically initially focuses on industries such as manufacturing and construction that are particularly sensitive to business cycles and interest rates. However, Goldman Sachs said that the recent rise in the unemployment rate is widespread across all industries and may reflect an over-hiring situation after the COVID-19 pandemic in 2022.

'This time may really be different. The unemployment rate may rise because it is returning to its natural level,' Tedski said. Similarly, 'the Federal Reserve needs to seriously consider that although the labor market is not deteriorating rapidly, it is not as strong as it appears on paper.'

Editor/Lambor