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Evening Brief – 05.25.23

It is likely to require a further decrease in labor income growth if inflation is to return to the Fed’s 2% target. Despite Covid-19 stimulus programs and changes in borrowing habits, consumer spending has largely followed wage growth since the beginning of 2021. Unsustainably high spending growth is a natural byproduct of quickly rising household earnings, which need to slow for inflation to return to its target level of 2%.

Nevertheless, without going into a recession over the past year, the labor market has cooled. Without a rise in the unemployment rate, growth in average hourly wages fell to 4.5% from 6%, and the Employment Cost Index – a Fed favorite – fell to 5% from 5.7%.

Leading indicators of both income growth and the health of the labor market have been declining. From a high of 4.5 million in early 2022, the number of workers resigning each month has dropped to 3.9 million, and in recent months the number of people laid off has increased to pre-pandemic levels. Continuing jobless claims are also still above levels seen in late 2022 and more in line with pre-pandemic trends.

The FOMC’s median forecast for the unemployment rate in March was 4.5% at year-end, which was only marginally more optimistic than the December 2022 forecast of 4.6%. As time passes, those predictions appear more improbable. By the end of the year, the unemployment rate would need to increase by more than 0.1% every month to reach 4.5%, which would imply hundreds of thousands of jobs lost each month.

The economy has so far proven more resilient to rate hikes than was initially anticipated, which has both lengthened the time for fighting inflation and decreased the still-high odds of a recession.

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About Joe Palmisano

Joe Palmisano is Editorial Director for Connect Money, where he brings nearly three decades experience of market insights as a financial journalist, analyst and senior portfolio manager for leading financial publications, advisory firms, and hedge funds. In his role as Editorial Director, Joe is responsible for the selection of content and creation of daily business news covering the financial markets, including Alternative Assets, Direct Investment and Financial Advisory services. Before joining Connect Money, Joe was a financial journalist for the Wall Street Journal, regularly publishing feature stories and trend pieces on the foreign exchange, global fixed income and equity markets. Joe parlayed his experience as a financial journalist into roles as a Senior Research Analyst and Portfolio Manager, writing daily and weekly market analysis and managing a FX and US equity portfolio. Joe was also a contributing writer for industry magazines and publications, including SFO Magazine and the CMT Association. Joe earned a B.S.B.A. in Finance from The American University. He holds the Chartered Market Technician (CMT) designation and is a member of the CFA Institute.