Economic slowdown threatens job market stability in US As unemployment rate creeps up

Despite a solid 3.1 per cent growth in real GDP last year, the US job market faces increasing challenges as the unemployment rate ticks upward.

During the initial three years of the pandemic recovery, the labour market was a key factor propelling America's robust economic growth. However, recent indicators suggest that the job market is starting to slow down.

This is evident in both hard data, like the unemployment rate, and sentiment-based business surveys, revealing a clear cooling trend, Caliber.Az reports citing the foreign media.

This slowdown is worrisome because unemployment has a tendency to be persistent—once it starts increasing, it usually continues in that direction unless there is an intervention to halt the decline. The current deterioration suggests a potential rise in unemployment, and it is crucial that the Federal Reserve takes action to stabilize the job market.

The Federal Reserve's next steps will significantly impact the likelihood of preventing a significant increase in unemployment. Over the past few years, the Fed raised interest rates to curb rapidly rising prices. However, with inflation now largely under control, the focus has shifted to the labour market. Delaying the reduction of interest rates to support the economy could exacerbate the risk of a job market collapse.

The job market is at an inflection point

The US emerged from the worst of the pandemic shutdowns in early 2020, leading to a historic boom in the labour market. From April 2020 to April 2023, the economy added 25 million jobs, averaging 674,000 new jobs per month. By April 2023, unemployment had dropped to a 54-year low of 3.4 per cent, and hiring rates surged. This robust labour market significantly benefited average workers, with wages for lower-end service jobs in retail and hospitality seeing the fastest growth.

However, this trend has shifted over the past year. In the first half of 2024, the unemployment rate rose by 0.4 percentage points to 4.1 per cent, up by 0.7 percentage points from its historic low. While this may seem minor, it represents 1.1 million more unemployed Americans compared to April 2023 and about 550,000 more jobless individuals this year alone. Notably, the current unemployment rate of 4.1 per cent has returned to its pre-pandemic level, matching the rate from early 2018.

The rise in unemployment coincides with other indicators suggesting tougher times for job seekers: job openings, a proxy for business labour demand, have decreased, and even employed individuals are more anxious about their job security. The rate at which people are quitting their jobs in the private sector, which peaked at 3.3 per cent from late 2021 to early 2022, is now lower than it was at the start of the pandemic.

These job market warning signs are exacerbated by weakening economic data. Real GDP grew at an annualized rate of 1.2 per cent in the first quarter, and the Atlanta Fed's GDPNow model estimates a 1.5 per cent growth rate for the second quarter. This would result in an average growth rate of 1.4 per cent for the first half of the year, below the Fed's estimates for long-term potential.

Two major indicators suggest that the second half of the year may not see improvement. First, after a strong performance in recent quarters, the outlook for residential construction has dimmed as building permits have declined, potentially dragging down GDP growth. Second, consumption is slowing after a robust end to 2023. Retail sales and food services levels have remained flat for the past five months, indicating that people are starting to cut back on their spending.

The deteriorating growth outlook is significant because, despite real GDP increasing by 3.1 per cent last year, the unemployment rate still rose by 0.2 percentage points to 3.7 per cent. This suggests that employment trends typically follow economic growth. If a 3 per cent growth rate couldn't prevent unemployment from rising in 2023, it's uncertain why the unemployment rate would stay stable in 2024 if economic growth is considerably lower.

As the economy slows, the job market's outlook worsens. Once downward trends begin, they often accelerate and can be challenging to reverse. This phenomenon is illustrated by the Beveridge curve, which shows the relationship between job vacancies and unemployment.