Tentative signs have emerged that the U.S. economy is cooling in a way that would be welcomed by the Federal Reserve‘s inflation fighters: Companies are posting fewer available jobs, consumer spending has slipped and wage growth, while still healthy, is gradually slowing.
Those trends mark a contrast from the start of the year, when hiring was robust and Americans were still spending at a solid clip — factors that may have also helped keep inflation stickier than the Fed wanted. Yet with the economy no longer accelerating, economists and financial markets have begun to worry about the opposite scenario: What if the economy weakens more than is needed to cool inflation? Could it eventually turn into a recession?
The U.S. jobs report for May, which the government will issue Friday morning, may offer some insights. Economists have forecast that the report will show that employers added 180,000 jobs in May, about the same as the 175,000 for April. The unemployment rate is expected to have remained at 3.9%, which would mark the 28th straight month in which the rate has stayed below 4% and would be the longest such streak since 1953.
“It’s going to be interesting to understand if the economy is running out of gas or coasting into summer solid hiring,” said Nela Richardson, chief economist at the payroll processor ADP.
Richardson spoke Wednesday after ADP released its own data for May, which showed that employers — excluding government agencies — added 152,000 jobs last month.
If May’s hiring data comes in close to economists’ forecasts, it would fall well below the average monthly gain of 269,000 in the first three months of 2024. Still, a figure of around 180,000 would probably be welcomed as sufficient to keep the economy growing without threatening to overheat it. Steady increases in the number of people with jobs provides support for consumer spending, the primary driver of the economy.
Frank Fiorille, vice president of compliance and data analytics at Paychex, a payroll provider for small businesses, said that hiring actually accelerated among their clients last month.
“That sort of mom-and-pop, Main Street small business — we’re hearing still pretty positive things,” Fiorille said.
Fed officials will be scrutinizing Friday’s data on job growth and pay gains as they consider their next steps on interest rates, in particular when to begin cutting their benchmark rate. In its fight against inflation, the central bank raised its key rate 11 times beginning in March 2022 to its current 22-year peak. When the policymakers meet next week, they are poised to leave their benchmark rate unchanged but will update their economic projections, and Chair Jerome Powell will hold a news conference.
When the Fed began aggressively raising rates, most economists expected the resulting jump in borrowing costs to cause a recession and drive unemployment to painfully high levels. Yet the job market has proved more durable than almost anyone had predicted. Even so, Americans remain generally frustrated by high prices, a continuing source of discontent that could imperil President Joe Biden‘s re-election bid.
And now, growing signs suggest that the job market is settling back to something close to a pre-pandemic normal. The number of open jobs fell sharply in April for a second straight month, the government reported Tuesday, to the lowest level in three years. Still, openings remain well above pre-pandemic levels.
And the number of Americans who are quitting their jobs has also fallen back to pre-pandemic levels, a sharp shift from two years ago, when quits soared to record highs in the economic recovery from the pandemic. Workers typically quit when they have — or think they can find — a new, often higher-paying job, so the slowdown in quits has helped cool wage growth. Milder pay increases can help slow inflation because companies typically pass on their higher labor costs to their customers by raising prices.
A key reason why the economy is still producing solid net job growth is that layoffs remain at historic lows. Just 1.5 million people lost jobs in April. That’s the lowest monthly figure on record — outside of the peak pandemic period — in data going back 24 years.
After struggling to fill jobs for several years, it turns out, most employers are reluctant to lay off workers.