WASHINGTON — Tentative signs have emerged that the US economy is cooling in a way that would be welcomed by the Federal Reserve's inflation fighters: companies are publishing fewer available jobsconsumer spending has slipped and wage growth, while still healthy, is gradually slowing.
These trends contrast with the beginning of the year, when hiring has been robust and Americans were still spending at solid levels – factors that may also have contributed to inflation remaining more persistent than the Fed wanted. But now that the economy is no longer accelerating, economists and financial markets are starting to worry about the opposite scenario: what if the economy weakens more than necessary to cool inflation? Could it eventually turn into a recession?
The US jobs report for May, which the government will release on Friday morning, could provide some insights. Economists predict the report will show employers added 180,000 jobs in May, about the same as the 175,000 in April. The unemployment rate is expected to have remained at 3.9%, which would be the 28th consecutive month in which the rate has remained below 4% and the longest streak since 1953.
“It will be interesting to understand whether the economy runs out of gas or heads towards permanent hiring in the summer,” said Nela Richardson, chief economist at payroll processor ADP.
Richardson spoke Wednesday after ADP released its report own data for Maywhich showed that employers – excluding government agencies – added 152,000 jobs last month.
If May's hiring data comes close to economists' forecasts, it would fall well below the average monthly gain of 269,000 in the first three months of 2024. Still, a figure of around 180,000 would likely be welcomed as sufficient to keep the economy growing without threatening to overheat it. A steady increase in the number of people with jobs supports consumer spending, the main driver of the economy.
Frank Fiorille, vice president of compliance and data analytics at Paychex, a payroll service for small businesses, said hiring at its clients actually accelerated last month.
“Those kind of mom-and-pop small businesses on Main Street, we're still hearing some pretty positive things,” Fiorille said.
Fed officials will be closely watching Friday's data on job growth and wage gains as they consider their next moves on rates, especially when to start cutting their benchmark interest rate. In its fight against inflation, the central bank has raised its policy rate eleven times from March 2022 to the current 22-year high. When policymakers meet next week, they are set to leave their benchmark interest rates unchanged but will update their economic projections, and Chairman Jerome Powell will hold a news conference.
When the Fed began raising rates aggressively, most economists expected that the resulting rise in borrowing costs would trigger a recession and drive unemployment to painfully high levels. Yet the labor market has proven to be more sustainable than almost everyone predicted. Still, Americans generally remain frustrated by high prices, an ongoing source of dissatisfaction that could jeopardize President Joe Biden's re-election bid.
And now, increasing signals point to the labor market returning to something close to pre-pandemic normal levels. The number of vacancies fell sharply for the second month in a row in April, the government said reported Tuesdayto the lowest level in three years. Still, openings remain well above pre-pandemic levels.
And the number of Americans leaving their jobs has also fallen to pre-pandemic levels, a sharp shift from two years ago, when layoffs soared to record highs in the post-pandemic economic recovery. Employees usually quit when they have (or think they can find) a new, often better-paying job. The slowdown in the number of layoffs has therefore contributed to a slowdown in wage growth. Milder wage increases can help slow inflation because companies typically pass on their higher labor costs to their customers by raising prices.
A key reason the economy continues to generate solid net job growth is that layoffs remain at historic lows. In April, only 1.5 million people lost their jobs. That's the lowest monthly figure ever – outside the peak period of the pandemic – in data going back 24 years.
After struggling to fill jobs for several years, most employers appear reluctant to lay off workers.
