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Labor market conditions. – by Claudia Sahm

Tomorrow (9/6) is the jobs report for August 2024. There is intense attention for any clues on the direction of the U.S. labor market, particularly with the Fed set to begin cutting rates in a few weeks and concerns about a possible recession swirling. We will rightly spend a lot of time assessing labor market conditions in the next several months, so today’s post shares some key indicators to watch.

Keep in mind that no data point or data release will be decisive. They are more likely to confuse than clarify in isolation. Plus, there are near-infinite data configurations that should cause concern or encouragement. The interpretation of the data, especially as it affects Fed rate cuts, will be contested, and history is unlikely to be as good of a guide as in the past. All that said, the stakes are high to try to get it right.

Fed Chair Powell made news last month in Jackson Hole when he declared “the time has come” for the Fed to cut rates. After a laser-like focus on lowering inflation for almost three years, protecting the labor market against further weakening is also the Fed’s objective:

Overall, the economy continues to grow at a solid pace. But the inflation and labor market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.

The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.

We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.

It’s a remarkable and appropriate commitment to the Fed’s dual mandate—stable prices and maximum employment, especially when year-over-year PCE inflation remained above target at 2.5% in July and the unemployment rate at 4.3% was only a touch above the median of Fed officials’ longer-run projections. Recalibrating policy to avert further slowing in the labor market while maintaining progress on inflation is difficult. Even the first step of assessing labor market conditions is hard.