Good News for the Federal Reserve on Jobs and Inflation: Hopefully on Time To Avoid a Mistake

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Today (July 7, 2023) was a good day for those that believe the Federal Reserve (Fed) has done enough to slow down economic activity in order to rein in the U.S. labor market as well as inflation, i.e., that is, for us! This doesn’t mean that the Fed is going to agree with us any time soon, but it helps us be more confident regarding our outlook for the second half of the year.

In our Thoughts of the Week for June 9, 2023, we indicated that there were sectors of the U.S. economy that had already created more jobs during the first five months of the year than during the whole of 2019, just before the COVID-19 pandemic recession. In our Thoughts of the Week for June 30, 2023, we also indicated that the jobs created during the first five months of 2023 represented 80% of all the jobs created in all of 2019. If we include today’s jobs, with six months of 2023 under our belts, this economy has created about 85% of all the jobs it created during twelve months in 2019. Thus, it is clear that employment growth will continue to slow down at a fast pace during the second half of 2023.

One sector that is extremely overstretched is government employment. After the first six months of this year, government employment is about 179% of what the sector had created for the whole of 2019. State government employment, which represents about 64% of all government jobs – 23% of government employment is at the local level while about 13% of government employment is at the federal level – is the largest culprit of the increase in total government employment in 2023. However, we expect overall government employment growth to slow down considerably during the second half of the year.

U.S. government jobs were up 60,000 during the month of June. However, it wasn’t the federal government that created most of the government jobs in June, it was state governments (up 27,000 jobs) and local governments (up 32,000 jobs). Thus, as we said above, government jobs are due for a strong slowdown during the second half of the year. Another sector, but much smaller, was mining and logging. In this case, the sector showed a decline of 1,000 jobs in June.

Employment in wholesale trade, retail trade, transportation and warehousing as well as in the utilities sector showed declines in employment in June also, adding support to our view that employment growth is slated to continue to weaken during the second half of the year. Furthermore, some of the sectors that were lagging behind job growth compared to 2019 continued to post strong job growth. This is especially true for the health care and social assistance sector, which typically does well during periods of economic weakness because of the needs of our aging population. Thus, strong job growth in this sector should not be a big concern for Fed officials as they decide what to do with the federal funds rate going forward.