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The Red-Hot US Labor Market Is Suddenly Not

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The Federal Reserve looks like it’s finally getting what it really needs in its fight to tame inflation: a cooling in the red-hot labor market. Although recent data suggest a firming in the economy, with consumer confidence, manufacturing and personal spending all exceeding forecasts, buried deep in those reports is more compelling information about the Fed’s ability to get inflation back under control without forcing the economy into a recession.

First, the Conference Board said Tuesday that its monthly consumer confidence index for May was 106.4, which was higher than all but one of the 54 economist forecasts gathered by Bloomberg. Nevertheless, the portion of the index measuring the difference between those saying jobs are plentiful versus those saying jobs are hard to get capped its biggest two-month slide since the depths of the financial crisis in early 2009 excluding the pandemic era. The decline of 7.8 points over the course of April and May “is fairly notable and is usually consistent with a recession,” Tom Porcelli, chief US economist for RBC Capital Markets, wrote in a research note Tuesday. 

Second, the Institute for Supply Management said Wednesday that its gauge of factory activity increased to 56.1 last month from 55.4 in April. The level exceeded all but two of the more than 60 economist forecasts gathered by Bloomberg. Again, though, jobs were a weak point. The employment portion of the index fell below 50, the dividing line between growth and contraction, for the first time since November 2020. Back then, the economy lost jobs the following month.

For the first time since the economy began to re-open after the Covid-19 lockdowns, we’re hearing of more companies either pulling back on hiring or outright cutting jobs. The big venture capital firm Sequoia Capital told the founders of its 250 or so portfolio companies in a Zoom call last month that the current environment is a “crucible moment”  in laying out the case for a long and drawn-out recession.  After adding more than 1,500 employees over the last year, grocery delivery startup Instacart Inc. said last week that it is planning to slow the pace of hiring as it prepares for an initial public offering, focusing instead on profitability. Pandemic-era darlings such as fitness company Peloton  Interactive Inc. have been laying off workers. There is no real cause for concern about the overall health of the economy. The Labor Department said Wednesday that job openings remained elevated in April near record levels, amounting to roughly double the number of unemployed Americans. And in many ways, especially with those companies such as Peloton that ramped up hiring during the pandemic to meet a spurt in demand, the new approach to the labor force feels more like a normalization or a right-sizing than the beginning of a recession led by broad layoffs. RBC’s Porcelli made clear that he isn’t making the case that the economy is in a recession, but rather “between the labor diff, initial jobless claims that seem to have put in the lows, and some companies now talking about scaling back headcount, the labor backdrop seems set to soften up.”

The current situation means that the Labor Department’s critical monthly jobs report this Friday could be the rare situation where a bad report could be seen as good news. (The median estimate of economists surveyed by Bloomberg is for the government to say that 325,000 jobs were created in May, the fewest since April 2021.) As my Bloomberg Opinion colleague Conor Sen has pointed out, the Fed has told us that the labor market is out of balance and needs to soften at least a little if it hopes to get inflation under control. The reason being is that wage gains, a big driver of inflation, have averaged 5.3% year-over-year since October, double the pre-pandemic average between 2014 and 2019, according to the Labor Department.

Seeing the boil come off the labor market would go a long way toward helping the Fed tame inflation while piloting the economy to an elusive soft landing. That would probably mean fewer interest-rate increases than are currently priced in by the markets.  More From Other Writers at Bloomberg Opinion:

• Fed’s Mild Inflation Forecasts Need Explaining: Bill Dudley

• Is a Recession Coming? Beware of This Indicator: Kathryn Edwards

• Job Market Is Heading for a Soft Landing of Its Own: Conor Sen

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.

More stories like this are available on bloomberg.com/opinion

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