Washington, D.C. CNN –
The long-robust U.S. labor market continues to cool, according to several economic indicators released this week. This represents some progress for the Federal Reserve, which is seeking weaker job creation and an overall slowdown in demand to combat inflation.
Specifically, Fed Chairman Jerome Powell said last week that the central bank needs to post “below-trend growth” for an extended period of time to ensure inflation is on track to 2%, the Fed’s stated inflation target.
Powell warned last Friday in a keynote address at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, that signs of “sustained above-trend growth” could lead to “further tightening of monetary policy” – or, more simply, additional interest rate hikes .
The Labor Department’s August jobs report should help allay those fears.
The Fed is “no longer chasing inflation,” Steve Wyett, chief investment officer at BOK Financial, wrote in an analyst note. Instead, central bank officials have likely gotten into a position where they can “allow the effects of their previous actions to permeate the economy and markets.”
Here are the key takeaways from this week’s jobs data and what it all means for the Fed.
There are numerous signs that the labor market has continued to weaken and that momentum is likely to continue in the coming months.
The unemployment rate rose to 3.8% in August from 3.5% in July, the Bureau of Labor Statistics reported Friday. Rising unemployment is bad news for Americans, but for the Fed it means some demand has been taken out of the economy, helping to ease price pressures. Strong demand typically prompts employers to hire more staff to meet that demand, which could mean offering higher wages to successfully attract talent. These higher costs could be passed on to U.S. consumers.
The August jobs report showed that average hourly wages increased just 0.2% monthly, or 4.3% annually. In July, these numbers were 0.4% and 4.4%, respectively.
The number of job vacancies fell below 9 million in July for the first time since March 2021 and the churn rate fell back to pre-pandemic levels, the Labor Department said earlier this week.
“Pretty much everything in the labor market has cooled back to pre-pandemic temperatures,” Julia Pollak, chief economist at ZipRecruiter, told CNN. “But the recent pace of the slowdown has been worrying for some economists as we have seen a fairly sharp slowdown in working hours, temporary employment services and other indicators.”
In August, temporary jobs fell by 19,000. Meanwhile, the average weekly working hours for all private employees rose slightly last month, although it has trended downward since the beginning of the year.
Earlier this week, the Commerce Department reported that the U.S. economy grew slower than previously expected in the second quarter, largely due to a sharp downward revision in business investment. But consumer spending, the main driver of the U.S. economy, rose 0.8% in July, the strongest monthly spending increase since January.
Still, economic data this week appears to have reflected enough moderation that the Fed will suspend interest rates later this month when officials meet to discuss monetary policy. Interest rates are currently at their highest level in 22 years.
A steady slowdown in the labor market is paving the way for a soft landing
The labor market is widely expected to weaken in line with the broader economy over the course of the year, and although monthly gains are still above the pace needed to keep pace with population growth, the labor market is slowing.
Overall, the job market is “coming back to normal, albeit from a very high peak,” Nick Bunker, head of economic research at Indeed, said in a note on Friday.
“Wage growth has never been able to keep up with last year’s pace. Wages would not rise indefinitely at an annual rate above 6%. The job market raced last year and is now approaching marathon pace. A slowdown is welcome; That’s the only way to go the distance,” Bunker said.
But economists and investors no longer expect a recession sometime soon. If the labor market remains stable, the Fed still has a chance for a soft landing – a scenario in which inflation falls back to the Fed’s 2 percent target without causing a sharp rise in unemployment.
Banks have tightened their lending standards, Americans have taken on more debt, student loan repayments will resume in October and there is still uncertainty about the extent to which the Fed’s 11 interest rate hikes in the last year and a half will ultimately weigh on economic activity.
All of these factors could devastate the U.S. consumer, and if Americans spend much less, companies could start laying off workers as their bottom lines decline. It remains to be seen how resilient the US economy will be in the coming months.
It’s also possible that the labor market will remain stable as recession fears continue to subside, allowing companies to address stubborn staffing shortages. Some small businesses continue to struggle to hire new employees.
“There are still many companies that say they were unable to fill an open position due to a skills shortage, but this enormous pent-up demand has been on hold since the beginning of 2022 due to fears of a recession,” Pollak said.
“But if they know for sure that interest rates will fall and there won’t be a recession, that could give them the freedom to save less capital and grow again.”