Transcription
It's getting harder to find work in the United States. In August, businesses added just 22,000 new jobs. That's actually quite a weak number. Looking at that in isolation, that would actually be a lot more consistent with the start of a recession, you know, historically. Gone are the days of 200,000 jobs every month. We're likely to be in an environment where job growth is hovering around zero.
Essentially, the US labor market is worse than previously thought. Less than half of the people polled by the New York Fed say they could find a new job if they lost their current one. Downside risks to employment are rising, and if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.
The Federal Reserve can give businesses more confidence to hire workers by adjusting the Federal funds rate. The Fed is lowering this key interest rate as companies navigate changes on trade, immigration and inflation. Companies are holding back because they're both trying to see what the tariffs will be, what the effect of the tariffs will be. And inside of that is what happens to their profit margins if. They're willing to deal with the uncertainty. But they need to react to that. And so part of that is just being very prudent in how they're hiring.
Why are jobs disappearing? And can the Fed do anything to bring them back? The slowdown in hiring is most potent for younger workers. We're seeing a lot of pressure on the younger generation when it comes to this labor market. We're seeing many firms facing higher import costs, and they are in many cases struggling with the cost of talent in a high interest rate environment. The tech space, the finance space, the professional and business services space are sectors that are under more pressure and they are the ones that generally are big hirers of younger cohorts.
Recent college graduates typically have better job prospects than the overall labor force. Historically, they have lower unemployment levels to that trend reversed starting in 2022. The United States has been suffering from a series of rolling recessions, pockets of industries or industries themselves that have gone through their own downturns, whether it was manufacturing or consumer goods. It just hasn't bubbled up to the broader economy. I would put the youth employment situation squarely in that category right now. The high paying information sector is flashing warning signs to software developer roles for workers in their 20s are down sharply since 2022. Young marketing and sales managers are having trouble getting hired as well. That said, younger workers are finding jobs in the health and retail sectors at a relatively fast pace.
We know that companies are turning to technology and AI to figure out if they can maybe stomach some of those costs, or bring some of those costs down without having to hire somebody, at least initially. AI is very new. The capabilities of it are not very well known. Well, to the extent that it can replace jobs. The first jobs it should be replacing are those new entry level, simpler jobs.
A small collection of industries are still adding workers. You're still seeing resilience in the healthcare space and in the leisure and hospitality space. Those two sectors are upholding the labor market, but there is increased evidence that over the next six months there might be more weakness out of these two sectors as well. Less than half of the private sector is adding jobs, and manufacturing would be one of the key industries. But we're also seeing increased softness in construction activity. A telltale sign that housing activity is experiencing a slowdown. We're seeing businesses being more cautious with who they hire, how much they hire, um, and also in some cases, proceeding with strategic layoffs.
The Fed's interest rate policies also contribute to today's labor market slowdown. These interest rates influence Americans job prospects and the pace of price increases. Lowering them can mean more jobs and more inflation. Raising them may mean less inflation and slower economic growth. The Fed took interest rates into restrictive territory in the first quarter of 2023. Since then, they've held the target for the federal funds rate high relative to the so-called neutral interest rate of around 3%. In other words, the Fed's past decisions are restricting today's economic growth. Nonetheless, with policy and restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance. Historically, it's the case that as the Fed tightens and starts to contain inflationary pressures, that eventually puts downward pressure on the labor market. It was the case that June actually saw negative payrolls, which was the first time that's happened since December of 2020. I think the Fed is cutting from a place where it believes it has room to be wrong. Fed policy is best designed to address cyclical issues. If it's cyclical, the Fed over time should be able to nudge us back onto the path, but it can't change the path.
Businesses that see lower interest rates could be motivated to hire more workers. A lot of it boils down to confidence. If I'm going to be facing relatively less restrictive interest rate policy, I can plan for that in the future and say, well, my burden here on the debt side is going to go down a little bit, but my business is still relatively strong. I can take that extra risk and make that investment in an individual or in some kind of technology. Lower interest rates have many other effects too. For example, saving rates on bank deposits may fall. Financing costs for a mortgage or car loans could move lower as well, but only if Treasury bond yields follow the Fed. Long term rates are incorporating a wider array of factors, which include a large budget deficit, which include trade policy uncertainty, and tariffs, which include higher inflation. And as a result, they're not moving as low as the Fed funds rate is likely to move over the course of the next year.
It's a highly political situation. It's totally rigged. Smart people know it. The slow pace of hiring is political trouble for the president. Experts say his policies could be contributing. Manufacturing or construction or trade and transportation. Those industries have been under the most pressure with hiring. Facts like that definitely point to the policy environment. You know, having a pretty serious and direct impact on on labor. So it's not as much a monetary policy issue, but you could also argue that some monetary policy easing and accommodation could help at the margin for sure.
Then there's immigration. Reduced immigration is curbing labor supply and reducing the so-called break even rate, the rate at which the unemployment rate starts to increase. You could think that over time, domestic unemployed or native born unemployed people could take the jobs of immigrants. Some of these jobs that are taken by immigrants are jobs that historically employers have found are not ones that are taken by native born people.
As the labor market deteriorates, prices are still increasing at a faster pace than the Fed's target rate. That makes an interest rate cut somewhat risky. Despite this, President Trump is pressuring the Fed to prop up the economy with lower interest rates. I really worry about the financial integrity of the Fed, much more than the financial integrity of the integrity of the BLS. If we lose the institutional integrity of the Fed. We're going to step back in a major way in terms of good economic outcomes. And let's not forget, we're coming off of an environment where inflation has been very high post pandemic, and many people are still struggling to make ends meet. We also have to look at this in the context of of an economy that is more supply shock driven. And when you have more supply shock driven environment, you are just definitionally. The Federal Reserve or any central bank just has less power in being able to combat inflation and also being able to to help the labor market. If the Fed is wrong here and it's cutting interest rates into an inflationary environment, then the impact could be negative for many people in the sense that you would have higher inflation and that would really hurt a lot of people.
U.S. job market is very dynamic. The trouble right now is that tax policy, immigration policy, tariff policy are all in flux. And so it makes it very difficult for businesses to adjust. Once things settle down, if the government backs out and gets out of the way of the free market, U.S. companies should create the jobs for those who need them.