Is the world’s largest economy showing signs of resilience? The answer may be yes, as the May 2024 job market data suggest that employers in the United States added 272,000 jobs, far surpassing economists’ expectations of “Slowed Hiring.” This increase from the 232,000-job average over 2023 has shifted the perception of an economy moving towards a more stable pace.
Of particular concern for the Federal Reserve, which will meet in June and again in July, is the 4.1% rise in wages compared to a year ago. This could indicate that inflation is still a lingering threat.
However, Fed officials said that the recent inflation reports (along with other key data) showed a slowdown in price pressures, something the central bank had been eager to see for a long time.
Chicago Federal Reserve President Austan Goolsbee said the Federal Reserve has made “a lot of progress” in bringing the inflation rate down over the past 18 months, citing the recent Consumer Price Index (CPI) data a more positive one.
“It’s just one month, but it was very good. If we got a lot of months like this, we would be feeling so much better that we’re getting inflation to the Fed’s target rate of 2%,” Goolsbee noted.
Cleveland Fed President Loretta Mester, due to retire at the end of June 2024, termed the CPI report as a “great gift” for her last meeting, while also noting that inflation was still too high and would take “some time” until it reached its target rate, likely not until 2026.
Talking about the CPI data, it remained unchanged from April to May, apart from becoming the lowest monthly inflation rate since July 2022. The ratio has been down from a 0.3% monthly increase in April, and less than the 0.1% forecasters had expected. Over the past 12 months, prices rose 3.3%, down from 3.5% in April and less than the 3.4% median forecast.
Analysts see slower price increases bringing relief to household budgets in more ways than one by stabilising the post-pandemic surge of inflation. Falling gas prices contributed to the lowering of inflation, falling 0.4% over the month, but are still up 3.6% in the 12 months ending May. Other forces were downward vehicle insurance costs and flattened grocery prices. Add low vehicle buying prices, along with reduced apparel and flight ticket costs, to the mix.
Will Fed cut rates?
As per Beth Ann Bovino, chief US economist for US Bank, “For those who may have thought they would see a July rate cut, that door has largely been shut.”
While wage gains benefit workers, she pointed out that continued price increases diminish their purchasing power.
However, the outlook for the labour market is not entirely clear. According to the report, the unemployment rate increased to 4%, its highest point since January 2022. This data, based on a survey of households, revealed minimal employment growth over the past year and an increase in part-time positions at the expense of full-time jobs.
While the data from employers, which determines job growth, is typically more reliable, the household survey has recently aligned more closely with other economic indicators. Retail sales have stagnated, the GDP growth rate has declined in the first quarter, and the number of job openings is at its lowest since 2021.
This is the reason why the majority of economists have anticipated a decline in employment growth and a further increase in the unemployment rate in the present year.
Parul Jain, Chief Investment Strategist with MacroFin Analytics, said, “Other than health care, we’re not seeing as much strength in the data. Growth in 2024 is unlikely to be very strong, consumers are pulling back quite a bit, and we expect that disposable income is also going to be affected.”
Identifying employment drivers
Healthcare has been a major driver of employment growth for the past two and a half years, accounting for 18.6% of the jobs added. The demand for healthcare services has been spurred by an ageing population and increased insurance coverage under the Affordable Care Act, increasing access to care for more people.
In contrast, the leisure and hospitality sector took until April 2024 to recover its pre-pandemic employment levels. Forecasts suggest that a record summer travel season may help boost employment in this sector in the months ahead, but most experts do not expect job growth to match the levels seen in previous years.
Recently, United Airlines revealed that it plans to increase its workforce by 10,000 employees in the current year. This number is lower than the 16,000 jobs added in 2023 and 15,000 in the previous year, signalling a shift from pandemic recovery to natural expansion.
Job growth exceeded expectations partly due to government employment rebounding faster than anticipated, despite predictions of a decline once federal pandemic relief funds were depleted. In May, the sector gained 43,000 jobs. However, there are still concerns about a potential slowdown in the future.
The labour market has seen significant growth thanks to an increase in legal immigration as well as a rise in the number of migrants with temporary status finding work through accelerated work permits.
However, hiring for native-born workers has decreased while it has remained stable for those born outside the country, according to the WE Upjohn Institute for Employment Research.
Decoding things further
President Joe Biden’s executive order limiting asylum seekers at the southern border may impact this trend in the future. On a positive note, the percentage of people aged 25 to 54 who are actively working or seeking employment has reached its highest level since early 2002 at 83.6%, with women in this age group leading the way and achieving their highest participation rate on record in May.
The situation is less optimistic for young adults in their early 20s, as their participation rate decreased in May. With employers retaining their current workforce and fewer employees leaving voluntarily, there are limited opportunities for those with limited work experience, who have been struggling to find employment.
Additionally, individuals over the age of 55 have not re-entered the workforce in significant numbers, with their participation rate still two percentage points lower than before the pandemic. Some people have been forced back into work due to increased costs and insufficient retirement funds.
Biden emphasised the job creation aspect of the report, stating that under his administration, 15.6 million more Americans have gained employment. He also acknowledged concerns about inflation and highlighted efforts to lower prices.
The state of the labour market leading up to the fall will have significant ramifications for the upcoming election. While most experts predict a slowdown in growth, the chances of a recession are currently low unless there is an unexpected external event such as increased conflict or a financial crisis.
The way ahead
Reacting to the latest job market data, Biden commented, “Three years ago, I inherited an economy on the brink. With today’s report of 303,000 new jobs in March, we have passed the milestone of 15 million jobs created since I took office. That’s 15 million more people who have the dignity and respect that comes with a paycheck.”
With the all-important Presidential election around the corner, the employment stats will further boost the prospects of the Democrat’s re-election bid. However, the bigger question here will be: what will be the Federal Reserve’s next move? Will the interest rate come down?
The Fed has boosted the rate from almost zero to over 5% within the past sixteen months. As per its chair Jerome Powell, the central bank will only lower interest rates in reaction to what it believes to be a weakening labour market. The overall inflation is way less than the June 2022 peak of over 9%, but the Fed is still in wait-and-watch mode.
Minneapolis Federal Reserve President Neel Kashkari stated that it is a “reasonable prediction” that the central bank will reduce interest rates in 2024, with a probable December timeline. Will this prediction come to pass? We will have to wait and see.