The labor market just won’t quit, but this could be another case of “good news is bad news” for the Federal Reserve.
The US unemployment rate has been at or below 4% for the past year and a half, and the economy has gained an average of 314,000 jobs each month this year through May.
People who need jobs are getting them, and those with jobs are getting paid more. Business and consumer sentiment remain resilient and spending and investment are also proving to be relatively robust. Gross domestic product, the broadest measure of economic output, grew by 2% in the first quarter.
But while job growth is a sign of a healthy economy, Fed Chair Jerome Powell has said that he wants to see more slack in the labor market in order to bring inflation down. If there are too few people chasing too many jobs, he says, wages will rise and add to upward pressure on prices.
Economists forecast that the US added 225,000 jobs last month, way down from the 339,000 added in May.
But here’s the thing: Those forecasts have been way off. They projected sharp drops in hiring for April and May; instead there was increased employment.
And so in order to get unemployment back to where it thinks it should be (5%), the Fed keeps pushing interest rates higher.
But some economists are starting to wonder if it will ever get there.
For decades, economists have said that the natural rate of unemployment in a healthy, stable economy was 5%. But in April, the unemployment rate reached 3.4%, with the 12-month average of unemployment reaching a record low of 3.6%.
“Growth and unemployment rates at these levels are not only a sign of an extraordinary recovery from the previous recession, but also are a sign that this is not your parents’ labor market,” said RSM US chief economist Joe Brusuelas. “Today, we think the natural rate of unemployment is closer to 4%, which reflects a mixture of efficiency gains driven by technology and demographic factors that dampen overall unemployment.”
The efficiency of searching for jobs online and a newfound ability to work at home means that there’s less friction in finding employment than ever before, he said. That may permanently lower unemployment rates. Plus, the mass retirement of baby boomers, slowing of immigration rates and long-term health impacts of Covid have also permanently altered the labor market.
These changes have led many economists to say that the labor market doesn’t matter anymore, said Kathryn Rooney Vera, chief market strategist at StoneX.
The gig economy, generational differences, and baby boomer retirement make this “unlike anything we’ve seen,” she said. “You have so much Fed tightening, and the most forecast recession in my lifetime, but consumers have not tightened their belts at all whatsoever.”
People clearly feel good right now, said Vera, and when people feel good their habits of consumption don’t change.
In an economy where consumer spending accounts for about 70% of America’s gross domestic product, you would have to have big negative detractors from the rest of the economy to really cause a recession.
