Does US Jobs Data Indicate An Interest Rate Pause?

The latest U.S. jobs report is a mix of positive and negative news as the national economy tries to achieve a so-called soft landing.

On Friday, the U.S. Bureau of Labor statistics released its monthly employment situation summary report. It said "total nonfarm payroll employment" rose by 187,000 in July, which was slightly below the expectation 200,000.

Unemployment "changed little" and was recorded at 3.5%. The 187,000 figure was slightly ahead of June's revised figure of 185,000.

According to data from the BLS, the pace of hiring has grown steadily since cratering during the coronavirus pandemic. Historic figures indicate the economy has been consistently adding more jobs since bottoming out at 130,430 in April 2020.

Colloquially known as the jobs report, the monthly summary is a major macroeconomic indicator used by the Federal Reserve and other economists to gauge the strength of the economy.

In a interview with International Business Times, Steven Kamin, a senior fellow at the American Enterprise Institute, said economists, and the Fed, will likely receive Friday's report as a "mixed bag."

The July report shows employment growth is slowing even as unemployment remains low as desired by the Fed. Kamin, a former director of the Federal Reserve Board's Division of International Finance, said the goal of the central bank is a soft landing of reducing year-over-year inflation to less than 2% without a recession.

For that to happen, he said there should be continued reduction of employment growth without unemployment rising and a recovery of real wages without creating "a lot of inflation."

"So we still await that last part," Kamin told IBT. "It's good news but not great news because I would have liked to have seen a little bit more softening of average hourly earnings growth than we saw."

The Fed is most likely worried about an outcome where labor markets remain tight. This promotes wage growth that remains too high to be consistent with the 2% inflation target. Month-over-month wage growth has remained above 0.4% which is concerning, Kamin said.

Keith Hall, a former commissioner of the U.S. Department of Labor's BLS and former director of the Congressional Budget Office, said the report is in line with the Fed's expectations of neither a large increase nor decrease in the number of job additions. A major jump one way or the other would push the Fed to modify interest rates.

Hall, now a distinguished visiting fellow at the Mercatus Center at George Mason University, said the jobs report also shows the labor market is still not fully recovered from the pandemic. While unemployment is low, the report is "hiding" an elevated number — more than 5 million Americans who desire a job but are not part of the labor force. The employment to population ratio is still not up to a pre-pandemic level.

In an interview, E.J. Antoni, a research fellow and public finance economist at the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation, said he was not sold on the strength of the job market. He was concerned about the BLS data collection and reporting methods in general but called attention to its household survey indicating a loss of nearly 600,000 full-time jobs and an increase in part-time jobs.

"If there were any jobs gained they were all part-time jobs," Antoni told IBT. "The big problem here is that that's a really good indicator of recession when businesses stop hiring full time and they are only hiring part time from and then from there you tend to transition to no hiring at all then eventually layoffs."

Jai Kedia, a research fellow at the Cato Institute's Center for Monetary and Financial Alternatives, said in an interview that it's a positive that employment numbers are remaining strong even with inflation continuing to fall, which increases the odds of a soft landing. The negative, Kedia said, is the Fed will potentially interpret the employment figures as a sign it needs to raise rates again in September.

Employment data is one of the major factors in the Federal Open Market Committee's decision to hike interest rates further or cease raising them. On July 26, the FOMC hiked the the target range of the federal funds rate by .25% to a range of 5.25% to 5.5%. Its currently at the highest level in 22 years.

Kamin said he was unsure about what will happen next. If disinflation continues over the next few months there could be a rate pause at the FOMC's next meeting, which is set for Sept. 19-20. He said he was unsure that inflation will fall enough for the Fed to forgo one final increase.

"If they do that, that would be a strong signal that it really thinks we're on the way and it's ready to call it quits as far as further hikes," Kamin said.

However, if inflation remains at about 3%, Kamin said its possible the FOMC would skip a hike in September but put one more in before the close of 2023.

Hall, now a distinguished visiting fellow at the Mercatus Center at George Mason University, said he thinks economic data shows the chances of a soft landing continue to increase. However, he said history is working against the U.S. economy because when the Fed is working against inflation, typically, "landings have not been soft."

As for a future rate hike, Hall said chances are equal the Fed will hike or pause rates in September.

Antoni said he's still calling for a recession based on his skepticism of the strength of overall economy, the labor market and economic data showing inflation is staying closer to 3% than 2%.

Antoni told IBT he believes the FOMC will pause in September but hike interest rates once more afterward. Fed Chair Jerome Powell is likely to say the central bank needs more time and data to assess whether its monetary policy measures are having the desired effect.

Kedia told IBT he believes the FOMC will hike the interest rate at its next meeting based on Friday's data, but its extremely hard to predict.

"This really is the larger problem ... Fed policy for a long time seems very discretionary. Its very hard for me to pick out exactly what they are looking at to make their decisions," Kedia said. "It's very hard to tell what data they are using or what method they are using to decide these rate hikes because there doesn't seem to be any."