Money & The Economy

Jobs May Be Up, But the US Economy Is Slowing

May job numbers look strong, but the data points to a slowing economy with persistent inflation.

The Bureau of Labor Statistics (BLS) just announced that the U.S. economy added a whopping 272,000 jobs in May. That is much more than economists expected. Despite that number, the unemployment rate increased from 3.9% to 4%, which seems inconsistent. Maybe the job market is not as strong as it appears.

The BLS uses two separate sampling surveys to determine the number of jobs created and the unemployment rate. The household survey rather than the survey that uses mostly large corporations, concluded that the number of jobs actually decreased by 400,000, which is why the unemployment rate increased.

If the 272,000 jobs number is more carefully examined, it reveals most of the jobs were created in the low-paying hospitality industry or were jobs created in the bloated government. The high minimum wage which has been increased up to more than $15 in many states, continues to keep the teenage unemployment number elevated. The current teenage unemployment rate is 12.3%.

The strong jobs number reported by BLS means the Federal Reserve is not likely to cut interest rates soon. That’s a problem for consumers who use credit to buy big-ticket items like cars and houses.

However, the high interest rates appear to be slowing economic activity. In the first quarter of this year economic growth fell to 1.3%. In the current quarter, the consensus view is that the economy will grow at a rate in the 1.5% range. As more data is available, it will likely show slower growth, even though government is reporting strong jobs numbers.

In the first quarter of 2022. job growth averaged more than 500,000 monthly. Yet the economy contracted, meaning negative economic growth. At that time, many economists forecasted a recession. Yet even though the first and second quarters in 2022 saw negative growth, the economy rebounded in the second half of 2022 and continued to grow into 2023.

Inflation, which peaked at 9.1% in June 2022, fell to just over 3% by November 2023. But then the rate got stuck and even increased in 2024. Currently, the annual inflation rate is 3.4%.

The strong jobs report will force the Fed to hold interest rates constant. If the economy is truly slowing, economic growth may turn negative in the second half of this year. If that happens, the U.S. will be stuck with stagflation, which many economists are saying is a real possibility.

Fortunately, energy prices are softening. That’s a big plus for the overall inflation number since energy accounts for almost 30% of the Consumer Price Index. Consumers have seen the average price of a gallon of gas fall from $3.54 in March to $3.47 today according to AAA. As oil prices fall in the world market, gas prices could move even lower.

It is also noteworthy to see that many large retailers like Target and Walmart are pledging to hold the line on price increases and are even lowering some prices. This is good news for consumers.

However, with annual wage growth averaging about 4.5% and with productivity falling to near zero, labor costs will continue to rise for business, putting upward pressure on prices.

Additionally, the federal government has deficit spent about $11 trillion in the last five fiscal years, which creates plenty of excess demand in the economy. That means even if energy prices stabilize or fall, inflation may stay well about the Fed’s 2% target, no matter which inflation measurement is used.

That means the Fed cannot cut interest rates even if the economy goes into recession. That creates a very difficult problem.

There continues to be much uncertainty in the economy. Some countries in Europe have begun to cut interest rates to prevent a further slowdown or recession. Those cuts may be premature if the inflation rate begins to rise.

The latest jobs numbers mean that the most likely scenario for monetary policy in the U.S. is that the Fed will not cut interest rates at all this year.

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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