‘Flashing yellow lights’: US job market deteriorates as election looms
The delicate work of taming inflation without choking off growth is coming to a head just weeks away from an election in which polling is neck and neck.
The U.S. labor market is deteriorating, but Federal Reserve Chair Jerome Powell might still have time to save it, with plans to begin cutting interest rates later this month.
The government reported on Friday that hiring is slowing, with 142,000 jobs added in August, fewer than economists expected. It also sharply revised down the gains from the two previous months. But after a worrying jump in the unemployment rate last month, joblessness actually ticked back down to 4.2 percent in August and wage growth accelerated.
“The big question is, did the Fed snatch defeat from the jaws of victory? Did the Fed keep rates too high too long?” said Aaron Sojourner, a labor economist at the Upjohn Institute for Employment Research. “Nobody knows that yet.”
The delicate work of taming inflation without choking off growth is coming to a head just weeks away from a presidential election where polling is neck and neck and the economy is a top priority for voters.
Inflation, among the biggest concerns for voters, is falling back to the central bank’s 2 percent target alongside a slow but noticeable increase in unemployment over the past year, prompting Powell and his fellow officials to say they’re ready to ease off the economy.
President Joe Biden touted the added jobs and falling unemployment rate as a sign the economy is still strong.
“With inflation back down close to normal levels, it is important to focus on sustaining the historic gains we have made for American workers,” he said in a statement.
The immediate question for the Fed is how quickly to lower borrowing costs. But most of the fallout will come after ballots are cast, meaning Powell’s decisions will set the backdrop for economic conditions as a new president takes office.
Fed policymakers will meet on Sept. 17-18, where they are widely expected to cut rates for the first time in more than four years.
“While the labor market has clearly cooled, based on the evidence I see, I do not believe the economy is in a recession or necessarily headed for one soon,” Fed Governor Chris Waller said in a speech Friday. “But I also believe that maintaining the economy’s forward momentum means that, as Chair Powell said recently, the time has come to begin reducing [rates].”
The labor market has been softening because there are fewer opportunities — bad news for recent college graduates or people looking to change jobs, but overall, less disruptive. Policymakers are worried that any further weakening will come through a more painful route: layoffs.
Fed officials aren’t seeing reason for panic, yet. “Reports of layoffs remained rare,” according to this week’s Beige Book, a document where central bank officials compile stuff they’re hearing throughout the country.
Weekly jobless claims also aren’t spiking. And the unemployment rate fell largely because it went up in July, driven by temporary layoffs — meaning companies expected to rehire the workers.
Still, the labor market is weakening.
Omair Sharif, president of Inflation Insights, wrote in a note to clients that the three-month average of jobs added is 116,000 after the downward revisions to the previous two months. There are so many jobs gained and lost each month — more than 5 million on each side of the ledger — that only a gain of at least 130,000 is statistically significant.
“In other words, we don’t know if payrolls were any different than zero in two of the last 3 months,” Sharif said.
Although Friday’s report doesn’t suggest a recession is imminent, John Waldmann, who is CEO of small business payroll company Homebase, said his company’s data showed “flashing yellow lights.”
“What we have seen is broad declines in employees working across pretty much all industries,” he said. Headcount shrunk by 3.5 percent relative to July, “which is normal seasonally, but the drop was sharper than the last few years.”
Their small business clients “react very quickly to changes in the market,” he added. “And what we are seeing is, fundamentally, they are just hiring less.”