“If you are hot then you are cold, if you are yes then you are no, if you are inside then you are outside, if you are up then you are down”. Pop star Katy Perry sang about an uncertain lover in her 2008 single, but Hot n Cold could just as easily have been referring to this year’s mixed US job market data. While many indicators were pointing to a decline, many were indicating just the opposite. The confusion was further compounded by the sudden revisions of some series, which sometimes turned the story upside down.
This is a big problem for all of us federal Reserve, Its twin mandate, maximum employment and price stability, means that the labor market is the main consideration. Therefore, this year’s mixed data raises the risk of a policy error by the Fed, which may either not raise rates enough or, alternatively, tighten further.
we take May Employment Report, While nearly 339,000 workers were hired during the month, the unemployment rate rose 0.3 percentage points to 3.7%, although the participation rate remained at 62.6%. There are occasional differences between the two figures, but rarely to this extent. Then why was there such a conflict? First, two separate surveys are used to calculate employment and unemployment data. The latter is derived from a survey mailed to households, which is more representative than the survey on wages of non-farm employers. In this group, the number of those who do not own a business (i.e. those who work for themselves in a non-corporate entity) fell to 412,000 in May.
Although this statistic may sound alarming, the context is important. A large number of Americans started their own businesses during the pandemic. Many of these were women, which may be related to the increased burden of caring for children at home during the lockdown. So now that restrictions have eased, it is not surprising to see a return to pre-pandemic levels and trends.
Ahead, The sample size of the household survey is much smaller than that of the payroll survey. To be considered statistically significant, employment must increase or decrease by 600,000 units during the month, more than four times the threshold of 130,000 units set for the payrolls survey. Therefore, the fall of 310,000 reported by the household survey in May may be completely wrong. In reality, employment may have increased.
This possibility becomes apparent when the household survey is adjusted for the payroll method, which allows for roughly equal comparisons. On this basis, both surveys point to a strong pace of hiring, with the adjusted household survey actually indicating an increase of nearly 400,000 jobs during the month.
however, The rise in the unemployment rate cannot be dismissed so easily. The increase is greater than the sampling error, which means it must be at least partially real. However, this could prove short-lived if the hiring pace remains stagnant. Since the Fed began raising rates last year, it has increased by 0.2 percentage points on the last three occasions, before declining in the following months.
This time it may be different, especially because other indicators are also in line with rising unemployment. Layoffs rose sharply from a low base in November, according to recruiting firm Challenger, Gray & Christmas. And that appears to be confirmed by initial jobless claims, which have risen in recent weeks to their highest level since October 2021.
It may also be skewed due to seasonal issues such as the Memorial Day holiday. These issues are going to continue through mid-July, given the variability of annual automotive retooling and Independence Day.
In parallel, wage growth has gradually come down. Average hourly wages are up 3.8% year-over-year and, while higher than before the pandemic, still represent a substantial slowdown from a peak of 6.2% at the beginning of last year. Notably, there has been a recent downward trend in working hours, despite heavy hiring.
But it is worth remembering that recent hiring has been concentrated among low-wage workers in the leisure and hospitality sectors. In contrast, higher-paying sectors have generally over-hired in previous years. Thus, weak wage growth may be a symptom of these compounding effects rather than necessarily a less competitive labor market. These effects can be examined using the Atlanta Fed measure. This measure takes into account the average salary of individuals over time, eliminating those at the extreme ends of the salary spectrum. On this neat measure of wage growth, the decline has been much more moderate, with its current rate up 6% from previous periods of labor market stress.
As demonstrated, the conflicting data makes it difficult to come to a definite conclusion about the current state of the US labor market, much less its future direction. This is mainly because the effects of the pandemic have persisted, which is one of the four reasons the Fed has struggled to contain inflation. And it is not clear to what extent these effects will subside or whether they will prove to be permanent.
all together, We assess that we are seeing a softening from last year’s very high, While this will reassure the Fed, committee members remain fearful of the risk of a resurgence in inflationary pressures, which appears to be happening in the UK.