Labor market rebounds, but weakness remains.
U.S. labor market conditions are key in deciding when to raise benchmark short-term rates from near zero, according to the policy-setting Federal Open Market Committee (FOMC). In the June Business Conditions Monthly (https://aier.org/bcm) report, we focused on FOMC member statements noting the need for “reasonable confidence that inflation is headed back up to the 2 percent goal” before initiating a rate liftoff. Policy makers also cited a need “to see continued improvement in the labor market,” and we turn our attention there this month.
Payroll jobs in the U.S. have risen to the highest level ever, reaching 141.8 million in June. The private sector accounted for 84.6 percent, the highest share since 1960. In addition, employers have almost 5.4 million vacancies, the highest number since data collection began in 2000 (Chart 1).
In addition, average hourly earnings reached a record $24.95. If we adjust for inflation to gauge purchasing power, the measure is at the highest level since 1974.
While important and impressive, these gains leave plenty of room for improvement. The unemployment rate stood at 5.3 percent in June, above the previous recovery’s low of 4.4 percent and higher than the FOMC’s expected long-run level of 5 to 5.2 percent. The underemployment rate, including part-time workers who would prefer full-time jobs and discouraged workers who have given up looking for a job, stood at 10.5 percent in June compared with a previous cycle low of 7.9 percent (Chart 2).
Despite the record, growth in hourly earnings has been quite slow, rising just 2.3 percent over the past year compared with a long-term average annual increase of about 3.2 percent.
Both the gains and persistent weakness are reflected in consumer sentiment data. A University of Michigan survey that we highlighted in April continued to show consumer expectations close to a cycle high and about on par with peak levels reached in the 2001-2007 expansion but below those of the 1991-2001 recovery. Likewise, surveys from The Conference Board show consumer confidence in the labor market has risen about 40 points from recession lows but remains about 15 points below the 2007 peak and more than 50 points below the 2000 peak. All in all, despite substantial progress since the recession, room for labor market improvement remains.
Economic Outlook
The proportion of AIER’s Business Cycle Conditions (https://aier.org/BCM) leading indicators deemed to be expanding was 64 percent in June, unchanged from May. Those readings follow three months at the neutral 50 percent level through April. Each month, AIER calculates the percentage of its Twelve Leading Indicators that are judged to be cyclically expanding. A reading above 50 percent indicates that continued expansion is likely.
Click for interactive Indicators at a Glance (on mobile device turn to landscape)
In our June evaluation, 64 percent of our leading indicators trended upward, marking the 70th consecutive month at or above 50 percent. Consistent readings above the midpoint suggest a low probability of recession over the next six to 12 months. Conversely, a drop below 50 percent indicates an increased chance of contraction. Before drawing conclusions, we look for confirmation from our cyclical score of leaders. For June, it was 83, down from 84 in May but still strongly positive. Considering our leaders’ index and cyclical score, we conclude that the first-quarter economic weakness was likely temporary and that there is a lower chance of a recession in the next six to 12 months.
The proportion of expanding coincident indicators remained at 83 percent in June, unchanged from May, when a 40-month streak of perfect 100 readings ended. While consistent with the first-quarter weakness, we expect to see the coincident indicators return to 100 percent in coming months. Among our six coincident indicators, three still reached new cycle highs.
The proportion of lagging indicators judged to be expanding also remained unchanged, holding at 80 percent. That was down from 100 percent in April and just the fifth drop below 100 percent in the past 37 months. Yet four of the six indicators reached new cycle highs, while just one trended lower. Overall, the percentage expanding and the cyclical score for our leading indicators suggest a rebounding economy and less chance of recession (Chart 3).