America’s jobs report is not as strong as it seems

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AMERICA’S JOBS report came in hot in April. On May 5th the Bureau of Labour Statistics reported that employers added 253,000 jobs the previous month—above the 180,000 expected by forecasters. But the healthy figure was offset by significant revisions to previous months. Employment data from February and March were revised down by about a quarter and a third, respectively. And history suggests that tighter monetary policy will soon begin to have a bigger impact on the labour market.

A bigger slowdown in hiring would be welcome news for the Federal Reserve. The Fed has raised rates ten times since last March, hoping to bring inflationcurrently at 5%, closer to its 2% target. On May 3rd the Fed increased its benchmark federal funds rate by a quarter of a percentage point, to 5-5.25%.

But demand for workers still exceeds supply in industries such as hospitality and food service. That puts upward pressure on wages. Whereas goods and energy accounted for the bulk of inflation in much of 2021 and early 2022, today services such as hotels, air travel and child care are the biggest drivers. In a weaker economy there would be less demand for these services, keeping prices in check. Companies in these industries would, in turn, need fewer workers, limiting wage growth.

Monetary policy works with a lag, meaning that it takes time for higher interest rates to begin discouraging consumers from spending, or firms from investing. One way to estimate the lag time for unemployment is to look at how long it typically takes for the jobless rate to start rising once the Fed has begun tightening. Having crunched the numbers on tightening cycles since the 1950s, Torsten Slok of Apollo Global Management, a private-equity firm, recently concluded that it takes roughly 14 months for interest-rate rises to cause unemployment to tick up (see chart). The Fed began its current cycle in mid-March 2022, so America should begin to see more workers pounding the pavement soon.

The big question is whether that looming increase in layoffs will add up to a recession. The post-pandemic labour market remains remarkably tight, with about 1.7 job openings per unemployed worker. One possibility is that employers will respond to higher interest rates by hiring fewer new workers rather than firing their existing employees. That would cut against Mr Slok’s analysis, suggesting that the increase in the unemployment rate will be much milder than normal this time around—perhaps making a coveted “soft landing” attainable, after all. But as the recent spate of bank failures shows, high interest rates are engendering new risks for the financial system. If banks turn more cautious, that will crimp credit availability for businesses, ultimately leading to slower growth. In that scenario America’s path to a soft landing will be much narrower, and the rock-solid labour market may finally start to crack.

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