Economic Update: May 2023

The Black unemployment rate ticked down to 4.7% in March – the lowest rate since records began in 1972 – but sadly this may suggest Black workers are beginning to struggle in an otherwise robust labor market. This is because unemployment fell as Black LFPR and EPOP both dropped, largely driven by a sharp decrease in the participation rate for Black men, who dropped out of the labor force in April at the fastest rate in three years.

A lion’s share of April’s job creation took place in services industries, as American consumers have continued to shift post-pandemic spending from goods to experiences. Health care for its part received a 40,000 jobs boost, highlighting increasing demand from an aging population now less constricted by pandemic lockdowns. Leisure and hospitality grew by 31,000 in April, but remains well below its pre-pandemic level by about 400,000 jobs. In general, we’re seeing the labor market remain resilient: layoffs remain relatively low, while job openings remain comparatively high.

As ever, there are mixed signals and clear clues that the US economy is softening. With manufacturing and retail sales slackening, economic growth slowed in the first quarter of 2023, growing at an annual rate of just 1%. Month over month job creation is also slowing, falling to its lowest level in March since December 2020. And in April, temporary help services shed 23,000 jobs, and losses in this industry are generally considered a bellwether for economic downturn. Job gains for March and February were also revised downward by 149,000, signaling that the labor market is actually cooler than initial reports might suggest.

Moreover, we now have some new and unusual headwinds to contend with. In just the last two months, the US financial system has been upended by three of the four biggest bank failures in US history. As banks become increasingly less willing to lend, credit will continue to tighten for households and businesses and over time slow the economy. (Extra credit: read the Fed’s scathing postmortem of the SVB collapse). The real estate market in particular is showing signs of weakness: sales of existing homes plummeted 22% in March as compared to 2022. The Fed has also recognized increased risk in the commercial real estate sector, as jumping interest rates could make it difficult for borrowers to refinance, and credit losses in this sector also particularly impact smaller banks. And of course, an unprecedented default on the federal debt could spell catastrophe for the American economy, possibly even triggering a global financial crisis.

What’s the current stance on inflation and continued rate hikes? While overall inflation has cooled, “core” inflation (excluding volatile food and energy costs) has remained persistently high. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, showed that prices rose 4.2% in the 12 months ended in March and, excluding food and energy, rose by 4.6% annually. That’s still a significant tick above the Federal Reserve’s 2% inflationary target: “the bad news is that wage growth hasn’t come down as much as it needs to and inflation hasn’t come down as much as it needs to”.

If the Fed Chair doesn’t believe that wages are a primary driver of inflation, and as the price of energy and goods have cooled post-pandemic, then what exactly is propelling inflation today? The increased cost of services.