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.
In its advance estimate, the BEA announced that Q1 GDP declined 0.3% on an annualized basis. Total output (GDP) is the sum of consumption, investment, government spending and net exports (exports – imports). Given the turmoil from Washington, DC, investment and imports saw outsized gains, 21.9% and 41.3%, respectively. But one needs to be careful here in interpreting these numbers. Imports do not add or subtract from GDP. Those who claim that imports are a drag on GDP are simply wrong. When someone imports a $1,000 TV (imports go up but enter the GDP calculation with a negative sign), someone buys that TV so consumption goes up by that same amount. It seems that most journalists reporting on this make the mistake that it was, in fact, imports driving down GDP. Here is a nice explanation that goes deeper.
Consumption grew 1.8% and government consumption fell 1.4%.
A different way to view the GDP numbers is in terms of contributions of the major components to output growth (that is, weighting the growth rates of the various components by their shares of GDP). Recall that output growth was -0.28% (annualized). Investment contributed 4.01 percentage points to output growth while consumption added 1.24 points. Exports chipped in a meager 0.2 percentage points. Negative contributions were recorded by government spending (-0.25 percentage points) and -6.48 points due to the surge in imports.
The BEA also released the Personal Income and Outlays report that showed an annualized decline of 0.53% in the personal consumption expenditures price index in March (down from 5.47% in February) while our preferred trend measure came in at 2.46% (a drop from February’s 3.96%). On a year-over-year basis, PCE inflation slipped from 2.69% to 2.29%. The core PCE inflation remained positive at 0.33%, a plunge from 6.14% in the previous month); our trend measure dropped from 4.03% to 2.80%; and the year-over-year rate dipped from 2.96% to 2.65%. Interestingly, these declines in PCE inflation were largely foreshadowed by similar declines in CPI inflation (released two weeks ago).
The large spike in imports could plausibly be caused by buying before the tariffs kick in and so would likely be transitory. The same might be said for investment as the largest component was equipment investment, rising 22.5% on an annualized basis. With the large effect from imports driving the decline in GDP and the fact that inflation remains above the Fed’s target presents a case for the Fed to keep the fed funds rate at its current level.
The BLS announced that the CPI fell 0.60% on an annualized basis in March, down from 2.62% in February. The year-over-year inflation fell from 2.81% (February) to 2.40% (March) while our trend measure dropped from 3.62% to 2.21%.
Inflation as measured by core CPI inflation (excluding food and energy) similarly fell. The annualized month-over-month rate tumbled from 3.49% to 2.55% while the year-over-year rate dipped from 3.14% to 2.81%. Our trend measure of core CPI inflation dropped even more, from 3.49% to 2.55%.
What does the CPI portend for the PCE deflator (to be released in a couple of weeks) and so monetary policy? Frankly, it’s hard to tell. While CPI and PCE inflation move together when looking at long periods of time, at much shorter horizons there’s a much looser link. For example, February’s CPI inflation fell relative to January, yet PCE inflation rose.
The good news for the policy outlook is that, at the time we are writing, President Trump has put a 90 day pause on his plan to raise tariffs on most countries. The one exception is China: both countries have raised their bilateral tariffs to prohibitively high values.
The BLS announced that payroll employment rose 228,000 in March after January and February’s lackluster performance. The private sector added the bulk of the jobs, 209,000, with the government sector adding 19,000. The federal government, however, lost 4,000 jobs in March having already lost 11,000 in February.
The manufacturing sector continues to struggle, adding only 1,000 jobs in March and only 4,000 jobs over the past three months. The service sector, on the other hand, grew 197,000.
Average weekly hours remained at 34.2 and average hourly earnings rose from $35.91 to $36.00.
The household survey showed an employment increase of 201,000. The number of unemployed persons increased by 31,000. The labor force participation rate increased from 62.4 to 62.5. The unemployment rate ticked up very slightly, from 4.14% to 4.15%. Note that the unemployment rate as well as those marginally attached are still near their all time lows.
The Jobs Openings and Labor Turnover Survey (JOLTS) was released on April 1. Overall, there was very little change in any of the metrics: openings, hires and separations. As of March, there are still slightly more job openings that unemployed individuals.
On April 2, 2025, President Trump announced drastic increases in U.S. tariffs. While uncertainty over these tariffs may have affected March job creation, the effects of the actual tariffs will only be reflected in the data starting with April data. The full effects of the tariffs will depend on things like: (1) Whether U.S. trade partners respond with their own tariffs; (2) Whether U.S. trade partners can come to an agreement to end the tariff war; and (3) How quickly U.S. firms can adapt their supply chains to the new tariff environment, including reshoring manufacturing jobs. A murky monetary policy outlook is even murkier.
