Updated expanded labor market dashboard indicates “substantial progress” has been made toward the Fed’s employment mandate

Link to full report and disclosures

*Last month, we analyzed an enhanced labor market dashboard that had built upon the dashboard of 12 indicators originally developed by former Federal Reserve Chair Janet Yellen to assess progress toward the Fed’s employment objective established in its new strategic plan (“An expanded labor market dashboard for assessing progress toward the Fed’s maximum inclusive employment objective”, July 15, 2021).  We concluded that, while labor markets had improved significantly, shortfalls from the pre-pandemic conditions remained and emphasized that, without any numeric guidelines, the Fed’s assessment of improvement in labor markets was subjective. 

*The robust data provided in the Employment Report for July and the JOLTs Report for June clearly suggest that the Fed’s criteria of “substantial further progress” has been achieved and is no longer “a ways off,” as Fed Chair Powell characterized in his semi-annual testimony to Congress in July.  While the recovery in labor markets has lagged real GDP, labor markets have recovered far faster than any recovery from recession in history, significantly exceeding earlier forecasts.  The data are striking.

                -The unemployment rate has fallen to 5.4% from its 14.4% pandemic spike. It is now well below its recent historical average and at or below levels of prior mid-to-late expansions.  Household unemployment has fallen to 8.7 million, an 83.2% retracement of its March-April 2020 spike, and is modestly above its pre-pandemic low. U-6, the broadest unemployment measure that includes marginally attached and part-time workers, has fallen to 9.2 from its 22.9% peak.  Unemployment rates of Black people (8.2%) and Hispanic people (6.6%) have fallen commensurately.

-Establishment payrolls have regained 75.5% of their March-April 2020 declines.  Monthly job gains have averaged 680,000 in the last six months as the economy has reopened. Further normalizing of activities is widely anticipated to restore employment to its pre-pandemic level.  Workers employed part-time for economic reasons have fallen back nearly to their 2019 lows.  Aggregate hours worked have risen materially above pre-pandemic levels.

-The labor force participation rate has recovered over half of its decline, and the employment-to-population ratio has risen to 58.4, a 72.4% recovery.  Improvements by Black people and Hispanic people have been commensurate.  

-Job openings have spiked to all-time highs (10 million) while monthly hires have risen sharply to 6.7 million but have been constrained by supply shortages. Job quits hover near all-time highs, reflecting worker confidence in labor markets.  Overall, the June JOLTs report signals ongoing strength in labor markets and points toward further job gains and lower unemployment.

The Fed’s assessment.  In its new strategic plan, the Fed prioritized maximum inclusive employment and favored above-2% inflation to make up for the lower inflation in prior years. Inflation has risen far above the Fed’s earlier forecasts and outside of the Fed’s acceptable range. Labor markets have exhibited substantial progress toward the Fed’s employment objective, even though most indicators in the expanded labor market dashboard are not yet back to the stellar levels that had been attained prior to the pandemic. In fact, in many ways, labor markets are exhibiting mature-cycle characteristics while the Fed’s monetary policy is still in emergency, recession-fighting mode.

A critical issue affecting the Fed’s assessment is whether it only looks at current conditions or considers its projections of likely future outcomes. In its June Summary of Economic Projections, FOMC members projected that the unemployment rate will fall to 3.8% by year-end 2022 and to 3.5% by year-end 2023, both well below the Fed’s estimates of longer-run full employment.  Also, does the Fed consider the negative impacts of labor supply issues, which are clearly beyond the scope of monetary policy?  The all-time high gap between job openings and hires reflects these supply-demand imbalances and points toward significant further hiring.

The conditions are in place for the Fed to announce that it will taper its asset purchases.  An announcement on the near-term horizon is consistent with our earlier expectation (“Strong U.S. Growth, Inflation and the Fed’s Challenges”, February 11, 2021).

The Fed’s far bigger challenge is normalizing interest rates.

The expanded labor market dashboard is below.

Link to full report and disclosures

Mickey Levy, mickey.levy@berenberg-us.com

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