June jobs report suggests Fed could avoid recession – but margin for error is tiny | Kiowa County Press

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Fed Chairman Jerome Powell hopes to orchestrate a very delicate dance. AP Photo/Manuel Balcé Ceneta

Christopher Decker, University of Nebraska Omaha

The US economy added more jobs than expected in June, signaling that the labor market remains strong even as the Federal Reserve tries to weaken it to control inflation. The July 8, 2022 jobs report also showed that the unemployment rate remained at its lowest level in 70 years, at 3.6%.

Does this mean the US will avoid a Fed-induced recession?

We asked Christopher Decker, an economist at the University of Nebraska Omaha, to explain the numbers and what they mean for the Fed and the economy.

What did we learn from the June jobs report?

The report showed the economy added 372,000 jobs in June. Although this figure is down from a revised increase of 384,000 in May and well below other recent gains, it is still very good by historical standards.

Gains were broad-based, with all key sectors contributing to the overall increase in non-farm payrolls.

Generally speaking, people continue to be drawn back into the workforce, largely through higher wages as well as the rising cost of living, making it harder for families to go without a stable income stream. For example, the number of people employed part-time for economic reasons fell by 707,000 in June. This seems to indicate that there is an increased desire and ability to obtain better paid and more stable full-time employment.

The female labor force participation rate fell slightly to 56.8%, more than a percentage point below what it was before the COVID-19 pandemic. This figure deserves to be watched closely and may be due to the fact that women are reluctant to re-enter the labor market or have difficulty finding childcare.

Does this mean there will be no recession?

That’s the big question.

June’s gains were solid, but the labor market is clearly cooling. And there is evidence that the economy as a whole is weakening – two signs that the Fed’s recent aggressive efforts to reduce inflation by stifling growth are working.

The housing market is a good example. Average 30-year mortgage rates hit a 13-year high of 5.8% in June after the Fed raised rates by 0.75 percentage points, which acted as a deterrent to home purchases.

And now we see the effect on residential construction jobs, which fell for the first time in a year as higher borrowing costs dampened demand. This is an area I like to examine closely to help determine if what the Fed is doing is taking root in the economy.

Additionally, in May, retail sales unexpectedly fell and a forward-looking economic index fell for a second month in a row – both signs of a slowing economy.

Can a recession be avoided?

It may seem strange that the US central bank is trying to hurt economic growth, but it shows how important policymakers think it is to tackle soaring inflation, which is currently the highest in over 40 years old.

The problem of rising prices is a major concern for the Fed, as it is a key part of its “dual mandate” to control inflation and maintain healthy job growth.

Rampant inflation is cancerous for any economy. When price growth exceeds income growth, consumers need to limit their spending. Production drops and people lose their jobs. The only way the Fed can reduce inflation is to dampen demand by reducing the money supply and raising interest rates. However, it also hinders economic growth. The Fed is therefore trying to manage a “soft landing” – meaning reducing inflation without hurting growth to the point of triggering a recession.

There are a few early signs that the Fed is succeeding. The economy is slowing, although June jobs show underlying strength in the labor market. At the same time, inflation also appears to be falling, partly thanks to lower global demand for oil. U.S. gasoline prices — the most visible price consumers see every day — have fallen in recent weeks after peaking at a record high of US$5 in June.

But executing a soft landing is a tricky dance for the Fed. The central bank can reduce demand via interest rates, but it can’t do much about supply. The main reason why energy and food prices have skyrocketed in recent months is not high demand, but the war in Ukraine.

Sanctions on Russia, the world’s second-largest crude oil exporter, and cuts in shipments from Russia to parts of Europe have disrupted energy markets and pushed up global oil prices.

And Ukraine, a major producer of food and other agricultural products, is struggling to export corn, wheat and other products because Russia is blocking key ports.

Ongoing energy and food shortages mean inflation could stay elevated no matter what the Fed does. And it could force the Fed to dramatically raise interest rates and cut growth to the bone to have a meaningful effect on rising prices.

That makes the Fed’s current dance the trickiest it has attempted since the 1980s, and it must be executed flawlessly for it to succeed. The June jobs report is good news, but the economy is not out of the woods yet. Data from August and September will be crucial in knowing which direction the economy is heading – towards recession or not.

The conversation

Christopher Decker, Professor of Economics, University of Nebraska Omaha

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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