Sturdy, sturdier, US employment

Friday’s employment figures show that the US labor market continues moving on with no regard to recession expectations. In May, the  nonfarm payroll employment surprised positively with an increase of 339 000 jobs, but unemployment rose from a record low level to 3.7%. There was a decrease in both wages and weekly hours worked, indicating that tension in the labor market continues to decrease.

There were mixed signals even within the report: in the survey of establishments nonfarm payrolls beat expectations for the 14th month in a row, but in the survey of households, the unemployment rate rose by 0.3% in one month, and most sharply since April 2020. However, the scale is still tilted toward the drivers of the labor market, also indicated by the number of job openings (higher than expected) and the number of new unemployment claims (remained almost unchanged).

The unemployment rate should continue to rise by about one percentage point by the end of the year to be at the level of the Federal Open Market Committee's 2023 forecast. In practice, closing the gap would mean a recession. Therefore, there may already be a downside in the Fed's unemployment rate forecasts. We will get to the bottom of the latest forecasts next week in connection with the Fed's interest rate decision. Connected to this a kind of fact check has been made concerning interest rate expectations in recent weeks and rate cuts are no longer seen as the best thing since sliced bread.

Now, FedWatch's expectations by the end of the year are mostly expecting a small drop in the current interest rate. So a difference has arisen from one month back when interest expectations were around 4%. This certainly also makes the Federal Reserve’s job easier, as visibility of monetary policy has weakened and the closer market expectations are to the Fed’s forecasts, the easier it is to make decisions.