News

US Economy Faces Threat of Unemployment

Over the past few years, the main danger to the condition of the United States economic system has been inflation, but over time the list of unfavorable facts of reality has expanded, adding a new threat.

US Economy Faces Threat of Unemployment

Currently, the problem of unemployment is increasing in the US. In this case, there is what can be described as negative progress. Unemployment is gradually moving from the category of an unfavorable circumstance with a limited impact to a sensitive threat to the economic system of the United States.

Currently, inflation in the US is on a downward trajectory, but at the same time, the labor market is sending very alarming signals to Washington. The opinion is beginning to circulate in the expert community that the Federal Reserve System is making a mistake by keeping interest rates at a high level for too long, rather than making a decision that is the most appropriate, and at the same time does not belong to the category of critically incorrect actions that provoking very negative consequences. Some officials of the central bank of the United States, according to media reports, citing insider information, are beginning to call for a relaxation of measures aimed at countering the inflationary process. This point of view is based on the opinion that high interest rates, which are a tool for curbing price increases, should be cut until the moment when the relevant components of monetary policy provoke the implementation of a recession scenario in the space of the US economic system.

Joe Brusuelas, chief economist at RSM, is one of those who is confident that it is time for the Fed to start lowering borrowing costs. According to the expert, inflation is gradually ceasing to be the main cause of concern in the context of the prospects of the dynamic of the economic situation. Joe Brusuelas said that the balance of risks is gradually shifting towards higher unemployment.

Mark Zandi, chief economist at Moody’s Analytics, says that the US labor market is facing difficulties related to high interest rates. The expert described the decision of the financial regulator of the United States to keep the cost of borrowing at the current level for a long period as a policy mistake. Mark Zandi noted that the Fed is currently signaling its intention to cut interest rates in September. The expert says that the mentioned solution is correct, but underlined that its more recent implementation may cause serious problems.

Fed Chairman Jerome Powell also acknowledged the shift in risk assessment for the United States economy. Last Tuesday, July 9, he told lawmakers that increased inflation is not the only threat Washington faces. In this context, he mentioned the so-called cooling in the labor market.

Currently, the Fed funds target range is steady at 5.25% to 5.50%.

It is worth noting that the transformation of the hierarchy of risks in terms of the existing and potential scale of their impact on the condition of the economic system of the United States currently does not mean that the employment situation is critical and not at a healthy boundary. Also in this context, it is important that a year ago many experts doubted the possibility of the current indicator of the intensity of the hiring process. However, there are risks and their existence is obvious.

Currently, the unemployment rate in the United States is historically low. According to KPMG economists, the situation in the labor market may change. The unemployment rate in the US reached 4.1% in June.

In the United States area of leisure and hospitality, which depends on consumer spending, hiring growth has slowed. The number of employees quitting has also decreased significantly. It is worth noting that a similar vector is typical for employees who are hired.

Jerome Powell, drawing attention to the mentioned tendencies, told lawmakers that there is now a clear signal that labor market conditions have cooled considerably. He also stated that there is no longer a state of affairs that can be called an overheated economy. It is worth noting that the current situation is exactly what the Fed was aiming for as part of its historic campaign to raise interest rates.

In 2022, there were widespread fears in the United States that the labor market would develop a state of affairs that would be so tense that it would become a factor contributing to higher inflation and keep prices at dangerously high levels. It was expected that the implementation of this scenario would force the Fed to start a recession to cope with the inflationary fire. Over time, the perception of the main risks to the United States economic system has changed significantly. Two years ago, the corresponding list included excessive inflation and a historically over-abundant labor market.

Currently, the main problem is that the Fed is injecting medicine to combat the rising cost of goods and services that the economy no longer needs. The continuation of the implementation of the appropriate action strategy of the financial regulator of the United States may create a situation in which the cooling labor market turns into a frozen one. The materialization of this scenario will mean the loss of jobs.

The latest government data released last week shows that the United States labor market added 206,000 jobs in June. The Fed says that the mentioned information indicates that the situation is not too hot and not too cold. This statement implies that the current state of affairs is balanced.

Joe Brusuelas says that a balanced labor market against the background of too tight interest rates by the Fed will not remain in the appropriate configuration for too long. In this case, a negative outlook is formed in the form of an increase in the unemployment rate.

Joe Brusuelas says that the mentioned probability does not mean a rapid deterioration of the labor market situation in the short term. At the same time, the expert notes that a premature recession will be realistic if the Fed decides too late to lower the cost of borrowing.

In a KPMG report published this week, senior economist Ken Kim said that the unemployment rate is close to triggering the Sahm rule, signaling the beginning of a recession. In this case, it means a situation in which the three-month moving average of the unemployment rate increases by 0.5% or more compared to the three-month average. Ken Kim also says that the services sector, a key engine of growth in the United States economy, is suddenly showing signs of weakness. The expert underlined that inflation is no longer the main problem. According to Ken Kim, the Fed has reason to worry about the risk of a sharp deterioration in the labor market and economic activity. The expert noted that the goal of the financial regulator of the United States is the so-called soft landing, but at the same time, a hard landing is a realistic probability.

For US residents, the main problem is the high cost of living. In May, inflation in the United States was fixed at 3.3%. The corresponding indicator is a significant progress compared to the situation in June 2022, when this figure was 9%. At the same time, the significant increase in the cost of goods and services that has been observed in the United States for more than two years continues to be a burden on the economy. Currently, US residents pay much more for groceries, rent, and insurance compared to the amounts that were relevant before the coronavirus pandemic.

It is also worth noting that inflation, gradually ceasing to be the main threat to the economic system of the United States, is still not a solved problem or, in a symbolic sense, a defeated dragon, the victim of which is financial well-being. The war in the Middle East poses a potential threat to energy production in the region. Also, the geopolitical tensions that are currently being observed in the space of international relations are clouding the economic prospects. In this context, it is worth mentioning the upcoming presidential elections in the United States, scheduled for November of the current year. Very often, the so-called electoral race is a period of political turbulence. For the economic system of the United States, the upcoming presidential elections are shaping what can be described as a situation of uncertainty.

Some economists are concerned that the potential implementation of the economic program of former US President Donald Trump, who nowadays is attempting to return to the White House, could provoke increased inflation. In this case, it implies the likely consequence of measures such as tax cuts, tariff hikes, and stricter immigration policy.

Mark Zandi says that cutting interest rates immediately before the presidential election may cause the Fed to find itself in a kind of political cauldron, which the financial regulator of the United States seeks to avoid.

Premature lowering of the cost of borrowing by the US central bank may stimulate demand from consumers and businesses. In this case, there is a risk of rising inflation.

Easing monetary policy in the current realities is a difficult decision that Jerome Powell and his colleagues will have to face. Historical experience shows that within the framework of the approach to cutting interest rates, one should act very carefully and cautiously. In the 1970s, the Fed quickly raised the cost of borrowing. This decision was made before the inflation figures returned to normal. Haste was the reason that the inflationary process was once again on an upward trajectory. Against this background, the financial regulator eventually had to act more radically and harshly.

It is worth noting that the Fed has underestimated the current inflation for a certain period in a certain sense. Many officials of the central bank of the United States perceived the mentioned state of affairs as temporary, incorrectly believing that the situation would normalize on its own.

Mark Zandi says that the Fed has post-traumatic stress associated with actions taken in previous years. In this context, the expert noted that the financial regulator did not start raising interest rates quickly enough to counteract inflation, which created the risk of having to keep borrowing costs at a high level for too long.

Serhii Mikhailov

3059 Posts 0 Comments

Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.