Is the US job market really in an ideal situation?
A solid but not overheated job market reduces the likelihood of a Fed rate cut in the next 12 months. The analysis by Jeffrey Cleveland, Chief Economist of Payden & Rygel
The August data on the labor market paint an "idyllic" picture of the US economy: job growth slows but remains positive and there are signs of easing in the labor shortage.
For policy makers, an ideal scenario: workers re-enter the workforce, easing fears of labor shortages and, at the same time, containing pressures on wage growth. The unemployment rate thus increases from the lows of the cycle, but not by much, avoiding a recession, with a consequent attenuation of inflation.
Although based on just one month of data, the August employment report hints at this "best-case scenario": the US unemployment rate rose by 0.2 percentage points – to 3.7% – trailed from an increase of 786,000 units in participation in the workforce, which rose to the maximum cycle rate of 62.4%. While still below pre-Covid participation levels, it is a decisive step in the right direction. Domestic employment, which had been weak in recent months, also increased by 442,000 in August. Wage growth, as measured by average hourly wages, slowed to 0.3% on a monthly basis, from 0.5% in July (albeit with a 5.2% annual rate of change. still higher than productivity growth). The employment / population of working age ratio jumped to 80.3% in August, approaching the full recovery of the pre-Covid high of 80.5%.
Meanwhile, job growth, which slowed from the torrid pace of +526,000 in July to +315,000 in August, remains robust and widespread across all sectors. The three-month moving average of job growth is +378,000, which, while slower than the 12-month average (+487,000), still reflects stellar job growth.
In conclusion, the August jobs report represents the ideal scenario for US politicians. There is no obvious need for the Fed to move to bail out a ailing economy, nor will there be concerns of "overheating" should the upturn in the workforce persist into the fall. We still expect the Fed to push the overnight rate to 4% by the end of the year, with a 75 basis point hike in September. The Cleveland Fed's short-term forecast for core inflation for August shows that a 0.5% increase month over month is likely, bringing the year-over-year reading to 6.2% (data to be released on September 13). Furthermore, it is still unclear whether an increase in average hourly wages above 5% is compatible with inflation of 2% – a key concern for central bankers. That said, a solid – but not overheated – job market reduces the likelihood of a Fed shift towards a rate cut in the next 12 months. While a report does not outline a trend, we believe the August jobs report is great news for a possible "soft landing".
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/mercato-lavoro-usa-agosto/ on Wed, 21 Sep 2022 06:06:39 +0000.