Easing Employment and Tightening Credit Conditions
A sigh of relief could be heard from many, particularly the Fed, following Friday’s US employment report, which signalled the cooling in the labour market could be underway. Not only did US employers scale back hiring, but the unemployment rate unexpectedly ticked up. Non farm payrolls missed expectations with +175k jobs added, versus expectations for +240K, and below the +183K pre-COVID monthly average. Further relief came from the rise in unemployment, to 3.9% from 3.8%. Average hourly earnings also came in below consensus, at 0.2%mom (exp. 0.3%) and 3.9% (exp. 4.0%), last month. Although wage growth eased the figure remains above the 3% mid-range, which Fed officials deem consistent with their inflation target of 2%.
Following the release, the Fed’s Goolsbee said: "the more job numbers resemble the ones we saw, the more we can expect an easing of inflation." We also heard from the central bank’s Governor Bowman who stated she expects “inflation to remain elevated”, adding that she expects inflation to decline further amid steady rates. Later Barkin said he expects high rates to slow the economy further and cool inflation to target. William said any rate cuts will be dependent on the totality of data, and Griffins expected a rate cut in December.
Ahead of the employment figures, we had the Q1’24 Employment Cost Index (ECI) which surprised to the upside at 1.2%, from 0.9% and against expectations for 1.0%. On an annualised basis the index was unchanged, at 4.2%yoy. The Fed favours the ECI wage track over others, as it offers a more comprehensive evaluation on compensation, including both wages and benefits. Additionally, the index accounts for shifts in employment composition, thus effectively tracking wage costs for comparable job roles over time.
Also of interest was the Federal Reserve's latest Senior Loan Officer Opinion Survey (SLOOS), which revealed that the cumulative effects of monetary policy are filtering through the financial system. Banks are growing more cautious about lending, and higher interest rates are suppressing demand for credit. However, the net share of banks tightening lending conditions is falling for most loan products, suggesting annual loan growth may be passing through its trough.
Tighter credit conditions stemming from banks' increased lending caution have a negative ripple effect on economic growth and employment levels. This aligns with the observed weakness in the US economy during the first quarter and recent labour market cooling signals. While the current credit tightening may not reach recessionary crisis levels, the abrupt shift away from typically smooth overall trending in the Federal Reserve's lending survey is concerning; and could be a potential warning for economic turbulence.
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