by paul gomme and peter rupert
There were several data releases as well as a Fed meeting this week. The Jobs Openings and Labor Turnover Survey (JOLTS) was released on Tuesday. The release reported that there was little change in job openings, hires and total separations. The graph below shows that there are still slightly more jobs available, 7,437,000 than unemployed persons, 7,015,000.
Another useful statistic is the rate of job openings, determined by the number of openings divided by the number employed plus openings, that is, filled and unfilled jobs. This number has been steady over the past year once the outsized rates in the post-pandemic period eased. The other rates in the graph are found by dividing the level by total employment. The quit and layoff rates have been flat in 2025.
On Wednesday the BEA announced that real GDP increased 3.0% on an annulaized basis in the second quarter. Consumption increased 1.4%, investment fell 15.6% and government consumption and investment increased 0.4%. Exports and imports declined, 1.8% and 30.3%, respectively.
A different way of thinking through the above National Income and Product Accounts (NIPA) data is in terms of contributions to output growth. The 3% growth in output can, then, be decomposed as: 1 percentage point due to consumption, 0.1 percentage points due to government spending and 5.1 points due to imports. Investment exerted a 3 percentage point drag on output growth while exports contributed -0.2 percentage points. Of particular importance is the 30.3% decline in imports following a 37.9% increase in Q1. A reasonable interpretation of this data is that Trump’s promised tariffs boosted imports in the first quarter (as businesses imported goods ahead of the tariffs). The large negative growth of imports in the second quarter then reflects an “unwinding” of the first quarter hike in imports.
On Thursday of this week the BEA announced the PCE price index from the Personal Income and Outlays release. The release showed an increase in the PCE price index of 3.42% on annualized basis after rising 2.03% in May. Our preferred trend measure increased to 2.66% from 2.28%. The PCE core measure cruised past the 3% mark to 3.12%, about half a percentage point higher than the previous month. Our trend measure of PCE core inflation rose from 2.69% to 2.83%. These PCE inflation numbers were largely foreshadowed by the CPI data released over 2 weeks ago.
Finally, at the end of the week, the BLS announced that payroll employment increased 73,000. Even worse, there were also downward revisions totaling 258,000; 125,000 in May and 133,000 in June. There was one small positive bit in the report, average hours of work increased to 34.3 from 34.2.
The goods producing sector shed 13,000 jobs for the third consecutive month. The service sector, however, saw continued growth, increasing 96,000. Interestingly, the diffusion index (indicating the fraction of firms increasing increasing or not changing employment) rose to 51.2, meaning that more firms increased employment than decreased it.
The household survey also showed considerable weakness, employment fell 260,000 and the labor force participation rate declined to 62.2 from 62.3. The unemployment rate inched up slightly from 4.12% to 4.25%.
Policy Outlook
The FOMC now finds itself in an unenviable position of seeing inflation well above target and a weakening real side of the economy. It may seem strange to describe the real side as “weak” when output recorded a 3.0% increase. The problem is the effect of tariffs on imports. We don’t want to make too much of the decline in exports, but will be watching to see if U.S. trade partners respond to U.S. tariffs by pulling back on their imports of U.S. goods and services – which will be reflected in lower U.S. exports. The -15.6% growth in investment similarly looks bad except that it comes on the heels of a very robust 23.8% growth rate in the first quarter.
On the real side, labor market developments are starting to turn down. We were comforted by the solid job gains in April and May, but the revised data suggests a more anemic job market. While the 73,000 jobs added in June look better than the revised numbers for April and May, that’s not saying much. The weak labor market would seem the best case for those pushing for a Fed funds rate cut.
On the other hand, inflation continues to run higher than the FOMC’s 2% target and is now moving in the wrong direction (that is, away from 2%). Some policymakers are arguing that the effect of tariffs will be a level shift in prices that will have no lasting effects on inflation. While this is plausible, this case would be stronger if there were evidence in its favor. We’ve yet to see such evidence. Remember that policymakers also argued that the effect of the pandemic would similarly be a left shift in prices with no lasting effects on inflation. As Montgomery Scott famously said, “Fool me once, shame on you; fool me twice, shame on me.”
Over the past few years, the FOMC has tried to engineer a so-called soft landing in which inflation is brought under control without causing a recession. The Committee now faces rising inflation and a potential recession. Since the Fed only has one instrument (the Fed funds rate), it cannot address the two targets, inflation and unemployment. Job one for monetary policymakers is to keep inflation in check. Let fiscal policymakers handle the real side.
