Over the past year Federal Reserve restrictive monetary policy restored the balance between aggregate supply and demand, easing elevated inflation. The increased cost of living was generated by Covid-19 and the pandemic and exacerbated by supply chain disruptions. These conditions had a widespread impact reducing consumer spending, depressing home purchases, raising rent and generally worsening the economic well-being of the population.
Inflation is now near 3.0 percent, down from above 7.0 percent at the height of the pandemic. During the recovery labor market conditions came into better balance, spurred by monthly job creation averages of more than 100 thousand, low unemployment, high participation, and historically low racial employment gaps. The unemployment rate is now 4.3 percent, mainly reflecting an increase in the supply of workers seeking jobs and a slowdown in the previously rapid pace of hiring rather than employment layoffs due to weak labor demand. Labor market tightness has declined significantly. Real wage gains (money wages adjusted for inflation) are concentrated among those with lower income.
Consumer spending strengthened in the second quarter accompanied by a pullback in discretionary spending. Low- and moderate-income families no longer have savings to support discretionary spending. Loan delinquency rates have risen from historically low levels observed during the pandemic. Consumer spending is forecast to level at a little over 2.0 percent in the fourth quarter. Inflation measured by CPI is forecast to level at nearly 3.0 percent for the remainder of 2024. Core inflation, excluding volatile food and energy prices, is forecast at 2.6 percent.
The consensus among economists is that inflation will decline further with the current stance of monetary policy, recognizing lags in price adjustments in response to changes in interest rates. In his speech at the August economic conference in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell reported that incoming data suggests the desirability of reducing the federal funds rate at the FOMC meeting in September. The key question is whether the rate cut will be .25 or .50, and how many more rate cuts, if any, are likely in future meetings this year. The economy is clearly on the path of an unprecedented soft landing, a condition in which restrictive monetary policy reduces inflation without generating a recession.
The Federal Reserve is cautious about cutting interest rates during a presidential election, lest the central bank be criticized for playing politics and threatening the central bank’s independence. A substantial body of economic research shows that central bank political independence is highly correlated with stable, balanced economic growth.
In short, the economic outlook shows the economy is moving forward at a modest growth rate generated by steady consumer spending in an environment of slowly declining inflation. The economy has largely recovered from the turbulence generated by the pandemic and reflects a new normal in labor market behavior. Many workers still work at home, and the number of dual job holders has increased, especially among women. The pace of change remains uncertain, and there is little change in income and wealth inequality. But the path forward shows no evidence of a recession. It’s steady as you go as the nation moves toward the end of 2024.
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In August, the economy generated 142 thousand jobs, 118 thousand in the private sector. The unemployment rate edged down to 4.2 percent. Labor force participation was unchanged at 62.7 percent; the employment / population ratio remained unchanged at 60.0 percent. Long-term unemployment declined to 1,533 workers.
Employment growth was concentrated in a few industries: leisure/hospitality (46 thousand), construction (34 K), health care (44 K). Employment declined 24 K in manufacturing and 11 K in retail trade. Employment was little changed in other major industries.
Average hourly earnings rose 0.4 percent to $35.21; year over year change was 3.8 percent. The workweek was unchanged at 34 hours.
Demographically, there was slight change in the employment experience of Black and White workers. The Black unemployment rate declined slightly to 6.1 percent, while the White unemployment rate remained unchanged at 3.8 percent. As a result, the Black/White unemployment disparity settled at 1.60, down measurably from the previously persistent 2:1 ratio. The Hispanic unemployment rate remained at 5.5 percent.
In short, the jobs report, coupled with other data included in the economic outlook statement, shows an economy moving forward modestly in an environment of declining inflation. The report supports the Federal Reserve’s plan to reduce interest rates at the September meeting, probably by 25 basis points.
Bernard E. Anderson, Ph. D., Whitney M. Young, Jr. Professor Emeritus, The Wharton School, University of Pennsylvania and Senior Economic Advisor, National Urban League