According to the BLS Employment Survey, the U.S. economy added another 147 thousand jobs in June — a very respectable number. Although the private sector saw a weak employment increase of 74 thousand.
The BLS noted gains in the government sector (gaining 73 thousand jobs, despite a reduction of 7 thousand at the Federal level) and health care (up 39 thousand jobs).
Average hours of work fell to 34.2 from 34.3 and has been oscillating between the two for several months.
From the Household Survey in the same BLS release, the unemployment rate dipped from 4.24% in May to 4.12% in June.
One dark spot in the employment outlook is that continuing unemployment insurance claims have risen in June. This increase may reflect increased difficulty of the unemployed to find suitable jobs.
JOLTS (Job Openings and Labor Turnover Survey) allows for a deeper dive into the data; this data was released on July 1 and includes data for May but not June. It continues to be the case that there are more available jobs than folks classified as “unemployed” (actively seeking a job). Of course, aggregate measures like these say nothing about the match between skills needed for open jobs, and the skills of the unemployed.
As the job openings rate has fallen since 2022, so has the hiring rate and the quit rate. Since JOLTS is a relatively new survey, it covers a span of time with very few complete business cycles. Consequently, it’s difficult to say what typcally happends to the JOLTS rates at the oneset of a recession. That said, around a recession as the labor market tightens we would expect to see a fall in the quit, openings and hiring rates, and a rise in the layoff rate. Thus far in 2025, it is hard to see any such changes.
While there were some spots of concern, the labor market shows little signs of weakening. Indeed the strength of the June report gives amunition to those on the FOMC advocating for no action at its July meeting.
The BEA’s personal income and outlays release for May provides a mixed message on PCE (personal consumption expenditure) inflation. Core PCE inflation which excludes the more volatile food and energy components rose from 2.58% to 2.68% on a year-over-year basis. This is the measure of inflation favored by the Federal Open Market Committee. The month-over-month rate popped up from 1.64% to 2.17% at an annual rate. And yet, our trend measure of inflation fell from 2.56% to 2.43%. Why the difference in these measures of inflation? Mechanically, the year-over-year rate is the average of the last 12 month-over-month inflation rates. The increase in the year-over-year inflation rate reflects the fact that this 12 month “window” added May 2024 (2.17%) while dropping May 2023 (0.98%). Meanwhile, our trend measure fell because the May 2024 month-over-month inflation rate (2.17%) is less than our trend measure for April (2.56%).
The picture is largely the same when looking at the overall PCE inflation rate: The month-over-month rate rose from 1.42% to 1.64%; the year-over-year rate edged up from 2.20% to 2.34%; and our trend measure eased from 2.25% to 2.04%.
The BEA release also shows a decline on a month-over-month basis in nominal personal consumption expenditures. However, this is a very volatile series. The year-over-year growth rate smooths out these fluctuations. Over the past few years, personal consumption expenditure growth has been falling. We place little importance in the month-over-month decline reported for May.
Real personal disposable income fell in May when computed on a month-over-month basis (its growth rate was negative) while the year-over-year growth rate declined.
Today, the University Of Michigan released its survey-based measure of inflation expectations over the next 12 months. In brief, consumers’ expectations of inflation have risen in 2025 and now sit at nearly 7%. Alternatively, the 5-year Breakeven Inflation Rate measures the average inflation rate over the next 5 years based on 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities. Given that the inflation-indexed security is based on the CPI (consumer price index), and CPI inflation tends to run 0.5 percentage points higher than PCE inflation, it seems that investors expect inflation to average very close to the Fed’s 2% target.
The University of Michigan also released its measure of consumer sentiment (or “confidence”). While this series exhibits considerable volatility, it seems fair to say that consumer sentiment has dropped quite sharply in 2025.
Policy Implications
Is it time for the FOMC to start lowering its policy rate? Jockeying by potential candidates for the Chair of the FOMC suggests it is. Based on the data, it’s hard to make a strong case for lowering the Fed funds rate at this time. The data analyzed above tells us that inflation is still running a bit too hot relative to the Fed’s 2% target for core PCE inflation. The labor market continues to record solid employment gains. In about a month, we will get an initial reading on Gross Domestic Product for the second quarter, but at this juncture, it seems likely to be a solid quarter. One could argue that the FOMC can raise rates again if inflation pops up. But this sort of interest rate volatility is something that the Fed tries to avoid, and it always seems more difficult to raise rates than to lower them. In summary, the economic case points to maintaining the Fed funds rate at its current level.
The FOMC announcements have typically called for no change in policy in order to wait for more conclusive data, given the uncertainty in tariffs as well as geo-political concerns. There does not seem to be much in the way of additional clarification, other than PCE core inflation has been riding steadily above the Fed’s preferred target.
The BLS’s announcement of the May CPI showed little change in the inflation rate. On a year-over-year basis, the CPI inflation rate ticked up from 2.33% in April to 2.38% in May. However, the annualized monthly inflation rate fell from 2.68% to 0.97%. Our measure of trend CPI inflation fell from 2.37% to 1.91%.
The situation was largely similar with regards to core CPI (excluding food and energy) inflation. The year-over-year measure barely changed, from 2.78% to 2.77%; the montly rate fell from 2.88% to 1.57%; and our trend measure dropped from 2.66% to 2.30%.
Fed watchers know that the FOMC focuses on core PCE inflation, not CPI inflation. That said, there’s considerable overlap in these two price level measures, and in general the two measures of inflation move together. Based on the CPI report, it seems unlikely that core PCE inflation will rise markedly. That inflation remains somewhat subdued and the real economy has not shown any real signs of slipping, it appears unlikely that the Fed will make any interest rate movements soon.
The Bureau of Labor Statistics (BLS) reported another month of solid job gains for the U.S. economy. According to the Establishment Survey, the U.S. added 139 thousand new jobs. Oddly, the Household Survey recorded a loss of 696 thousand jobs. Historically, it’s not unusual for these two surveys to give much different readings on the job situation.
The government sector lost around a thousand jobs owing to 22 thousand fewer jobs at the federal level.
The goods sector dropped 5 thousand jobs with the manufacturing component falling 8 thousand. The service sector added 145 thousand.
While the BLS report stated that the unemployment rate was unchanged at 4.2%, the unemployment rate actually ticked up slightly, from 4.19% in April to 4.24% in May. Moreover, it continues to trend up from the extremely low rates in 2022-2023. Note that the unemployment rate is still quite low compared to its long term average.
The Job Openings and Labor Turnover Summary was released on June 3 and showed that the number of job openings was little changed at 7.4 million. There are roughly the same number of job openings as unemployed person.
Mostly good news regarding PCE (Personal Consumption Expenditure) inflation. While the annualized monthly core PCE inflation rate rose from 1.3% (March) to 1.4% (April), this rate is nonetheless below the Fed’s 2% target. Further, the annual core PCE inflation rate slipped from 2.67% to 2.52%. And our measure of trend core PCE inflation dropped from 2.94% to 2.43%.
The picture is much the same for overall PCE inflation: The annualized monthly rate rose from 0.14% to 1.21% (again, below the Fed’s 2% target); the annual rate fell from 2.31% to 2.15%; and our measure of trend dropped from 2.59% to 2.13%.
The report indicated that real disposable personal income ticked up to its highest level since January, 2024.
We won’t prognosticate on the likely course of monetary policy since Fed Chairman Powell has already said that the FOMC will wait until the data indicates that the committee should change its policy rate. Chairman Powell also foresees stagflation for the US: a combination of higher inflation and a deteriorating real side of the economy.
Looking at the annualized monthly CPI inflation rate, March looks like an outlier: April inflation is up (again). The overall CPI rose from -0.6% in March to 2.68% in April; excluding the volatile food and energy components, core CPI inflation popped up from 0.68% to 2.88%. Nonetheless, the annual inflation rate fell slightly from 2.41% to 2.33% (overall CPI) or from 2.81% to 2.78% (core CPI). The decline in the annual inflation rate reflects the observaton that the monthly inflation rate for April 2024 exceeded that for April 2025.
Our trend measures of CPI inflation also rose: from 2.21% in March to 2.37% in April for overall CPI inflation, and from 2.55% to 2.66% for core CPI inflation. Regular readers will remember that our trend measure of inflation sees through the blips in the monthly inflation rate while also being more responsive to underlying changes in trend than the annual inflation rate.
We pay attention to CPI inflation because it tends to move together with PCE inflation (the Fed’s preferred measure) which will be released in a couple of weeks. The tick up in April’s CPI inflation suggests that we may see a similar increase in April’s PCE inflation. The prospects for the FOMC cutting interest rates remains dim.
April saw solid job gains of 177 thousand according to today’s Employment Report from the BLS. While employment gains in April were lower than the revised figures for March (185 thousand, revised down from 228 thousand), April’s job gains easily exceeded those over the past 12 months (152 thousand).
While the government sector added 10 thousand jobs in April, the federal government shed 9 thousand jobs. In fact, in each of the past 3 months, federal govenment employment has fallen, presumably reflecting the efforts of DOGE to reduce the size of the federal government workforce. However, as noted in the BLS’s press release, employees on paid leave or receiving severance pay are considered employed in the establishment survey.
The household survey portion of the employment report showed a small uptick in the unemployment rate, from 4.15% in March to 4.19% in Aprl. The unemployment rate has varied in a fairly narrow band, between 4 and 4.2% since the middle of last year.
In Aprl, average hourly earnings rose 6 cents, to $36.06. However, workers ought to care about the goods and services that their wages garner — that is, their real wage. The figure below shows that real average hourly earnings have been increasing over the past couple of years. How much the real wage has gone up depends on the measure of prices, with flatter real wage growth when measured using either the CPI or core CPI, and somewhat faster real wage growth using the PCE or core PCE deflator.
Many economists are predicting a severe recession if Trump carries through with his planned tariffs. Thus far, we aren’t seeing these effects in the labor market. Nor does the Chauvet and Piger measure show any threat.
CPI inflation for February (released a couple of weeks ago) brought the prospect of lower PCE defaltor inflation. It didn’t happen. On a year-over-year basis, PCE inflation barely changed, increasing from 2.52% (January) to 2.54% (February). While the annualized month-over-month rate fell, from 4.12% to 4.01%, our measure of trend rose from 3.06% to 3.38%.
Similarly, core PCE inflation (that is, excluding food and energy) rose in February: the monthly rate from 3.64% (January) to 4.47% (February); the annual rate from 2.66% to 2.79%. Our measure of trend core PCE popped up from 2.72% to 3.37%.
Core measures of PCE inflation have moved away from the FOMC’s 2% target. On the basis of these numbers, it seems unlikely that the Fed will be delivering interest rate cuts in the next few months.
PCE inflation for goods (durable plus non-durable) had been subdued for the past couple of years, actually falling for seven out of the last ten months. Recently, however, goods price inflation has been climbing and is now the highest since 2022. Service price inflation has been high and is climbing, nearly hitting 4% from January to February.
The Bureau of Labor Statistics Establishment Survey recorded an increase in employment of 151 thousand for February. This increase is only slightly below the average for the previous 12 months. Another way to think about the February number: it exceeds 6 of the previous 12 month employment gains.
While government employment rose by 11 thousand jobs in February, federal government employment dropped by 10 thousand.
The household survey from the BLS press release indicated a decline in the labor force participation rate (62.6% to 62.4%) and an employment-to-population ratio decline (60.1% to 59.9%). The report showed a slight increase in the unemployment rate, from 4.01% in January to 4.14% in February. For the most part, the unemployment rate has hovered around 4.1% for the last 8 months.
Although the unemployment rate has been trending up over the past year or so, keep in mind that it is, historically, quite low.
The headlines say that PCE (personal consumption expenditure) inflation fell in January. This is a case of “Yes, but …”. In particular, it is true that the year-over-year PCE inflation rates fell from 2.6% (December 2024) to 2.5% (January 2025) in the case of overall PCE inflation, and from 2.86% to 2.64% for core PCE inflation (that is, excluding food and energy). Looks like the Fed is doing a great job. However, the annualized month-over-month inflation rates jumped from 3.56% to 3.98% (PCE), and from 2.52% to 3.47% (core PCE).
How can we reconcile these divergent patterns to the year-over-year and month-over-month inflation rates? As we have previously explained, the year-over-year inflation rate is roughly the average of the past 12 month-over-month inflation rates. For example, the year-over-year inflation rate for December 2024 is the average of the 12 month-over-month inflation rates in 2024. Similarly, the January 2025 year-over-year inflation rate is the average of the 12 month-over-month rates running from February 2024 through to January 2025. As a result, every month the calculation for the year-over-year inflation rate adds in to this average the current month reading of the month-over-month inflation rate while simultaneously dropping out the monthly rate from 13 months ago. With all of this in mind, for core PCE inflation, the year-over-year rate for January 2025 added in the January 2025 month-over-month rate (3.47%) while dropping the January 2024 rate (6.14%). In this case, the year-over-year rate for January 2025 fell not because of a particularly favorable month-over-month rate for January 2025, but because of an especialy high rate for January 2024!
It is for reasons like this that we developed our measure of trend inflation. Without getting into the details, our measure of trend inflation is a “constant gain” measure of the average month-over-month inflation rates: it applies a constant weight to the current month-over-month rate, with the remaining weight applied to the previous month’s reading of the trend. Our measure of trend PCE inflation rose from 2.52% (December 2024) to 3% (January 2025) while our measure of trend core PCE inflation rose from 2.4% to 2.76%.
Another desirable feature of our trend inflation measure is that it responds reasonably quickly to changes in underlying trend inflation. Visually, we can see that the month-over-month inflation rates have trended up over the last half year. Our measure of trend reflects what can be seen in the data. While the year-over-year inflation rates will eventually also reflect such a change in underlying trend, it will take nearly a year to fully reflect the change in trend. In 2021, inflation rose sharply and the Fed appeared to be asleep at the switch. In particular, our trend measure was rising pretty quickly during 2020 and moved over the 2% target by midyear while the year over year measure stayed below 2% throughout the year and into 2021. One can only hope that the Fed learned something from its earlier mistake.
