Labor Imbalance

Last Friday, we received the monthly employment report which revealed that the US economy produced 390,000 jobs in May. This was much stronger than the 320,000 jobs the consensus was expecting – helping to reinforce the Fed’s narrative that the economy remains strong and that more interest rate hikes are needed to address elevated inflation. One critical factor that’s putting pressure on inflation is the current imbalance in the labor market. At the moment, there are around six million unemployed people in the US and more than 11 million job openings. In other words: for every unemployed person, there are approximately two job openings. Historically speaking, this situation is unusual and, by some estimates, could potentially take up to two years to stabilize. In this scenario, the central bank would need to continue to raise rates longer, increasing the probability of a hard landing. In the week ahead, we will receive May CPI inflation data, which is expected to stay at the same level it was in April (8.3%), still far above the Fed’s target of 2%.

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