US Labor Market and Rate Cut

Until the most recent U.S. jobs report, a rates cut in the near future seemed unlikely. However, there is now evidence for a softening job market, which may prompt the Fed to cut rates as soon as late June.

The number of new U.S. jobs was 75,000 in May, which is down from an average of 164,000 per month in 2019, and average of 223,000 per month in 2018. Additionally, the amount of jobs added in the previous two months was revised by a decrease of 75,000. A large portion of this is due to abysmal construction-job generation, which is an additional indicator that the overall economy is slowing. While the report is ominous, its results aren’t inherently troublesome. It may simply be a reflection of what the U.S. economy can healthily sustain over the long run. This is reflected by the record-high difference between job openings and unemployed citizens. While the year-over-year earnings growth in the private sector is down to 3.1%, it still has the potential to create employee attraction and retention.

Furthermore, economic uncertainties related to trade tensions with China and Mexico are still looming. These uncertainties may have already begun to affect the U.S. labor market, as evident from the somewhat surprising jobs report. Additionally, it is likely that trade tensions could have a much larger impact on the U.S. jobs market, U.S. economy, and global economy in the near future.

Due to the ambiguity of a softening labor market and the approaching trade wars, the odds of the Fed decreasing rates in the near future have greatly increased. However, whether or not a cut in rates would help the economy is still up to debate. If the economy is truly contracting, the effects of a rates cut may be limited, but there is still strong reason to believe it could improve labor markets, softened inflation, and slow spending.

Keith Knutsson from Integrale Advisors commented that “until we see the effects of trade tensions, many businesses may be cautious to expand employment.”

Overall, the health of the job market will depend heavily upon the Fed adjusting rates and the impact of the trade wars.