The FED facing the puzzle of the labor market

First of all because this is the theme of this year’s symposium: “The labor markets in transition: demography. Nevertheless, productivity, and macroeconomic politics”. Meanwhile, And it is also the burning subject. Meanwhile, Because since the last meeting. Moreover, at the end of July, a report on employment has thrown some doubts about the solidity of the labor market.

Unemployment rate against job creations

A solidity however claimed by Jerome Powell. Therefore, which is based for this on the unemployment rate. For example, Over fed facing puzzle labor market the past 12 months, it has remained between 4 and 4.2%, a level of full employment. Moreover, This is what allows him to say that there is no urgency to lower rates. However,

If we limit ourselves to this one indicator, everything is fine. In addition, But position creations are more worrying. Indeed. the latest employment report, the revisions of which have been highly commented on, show a clear deceleration at this level. Over the past three months, the average fell to 35,000, against more than 200,000 at the start of the year.

Mobile average 3 months of the unemployment rate. Source: Bloomberg

Is this dramatic? No, because the labor supply drops. Immigration has decreased sharply since the return to the White House of Donald Trump. The growth of the active population is much lower. It is therefore fed facing puzzle labor market necessary to create less employment to maintain the unemployment rate. In April, the Fed of St Louis estimated this breakeven (deadline) at 153,000 each month. Today, this number is probably much lower.

Seeing lower job creations is therefore consistent with the stop on immigration. But the weakness of job creations may not be just a supply problem. Because when there is a shortage of workforce, it pushes wages upwards. This is what we saw in the recovery phase after the pandemic. But today, wage evolution indicators do not show signs of such pressures. In July, the Indeed Wage Tracker was at its lowest level in 5 years, at +2.4% in annual rhythm.

The recent weakness of job creations is therefore also a demand problem. This would be consistent with the study conducted with small businesses (NFIB). in which there is a clear rise on the part of companies which cite fed facing puzzle labor market low sales as their main subject of concern. In the long term, it is an indicator rather correlated with job creations. The more companies face a low demand, the less they recruit.

Sources : Bank of America, Haver

Delayed indicator

The question now is whether it is all the start of a slowdown or if it is just a slight air hole. Indeed, in the spring, the uncertainty created by Donald Trump probably prompted companies to be more careful about hires. We cannot therefore exclude a rebound in post creations in the coming months.

Everything is fine as unemployment remains around current levels. The American economy is full employment, the Americans receive a salary and spend it, economic activity will be resilient.

The real difficulty is due to the fact that employment is a delayed indicator. When it begins to fed facing puzzle labor market go up. it is because the situation has already deteriorated and it is a little late to act (therefore to lower the rates).

But the Fed has a so -called approach data dependent (Data dependent). Mechanically, it leads to always look in the rear view mirror. Some therefore argue for a more prospective approach. This is the case for example of Neil Dutta of Macro Renaissance: “I think that the Fed should focus. on the direction of the travel now. Stress that inflation is further from the objective that employment can be problematic. Unemployment can vary in a non -linear way while inflation tends to vary more slowly”.

Inflation that has been going up for several months. As always, the Fed must therefore find a path to better hold its two objectives: maximum use and price stability.