America faces a summer of smaller raises — and fewer jobs

Getty Images; Tyler Le/BIThe US jobs market is almost never perfectly in balance. Even when things appear calm, there's some movement under the surface. Just take a cursory look at a chart of the national unemployment rate — the line is almost always moving up or down. Rarely does the line move sideways.This truism is why I have some worries about the fairly sanguine view that the most powerful economic policymakers have toward the state of the labor market. Federal Reserve Chair Jerome Powell recently said: "The labor market appears to be broadly in balance." Yes, unemployment remains low on a historical basis, and the pace of jobs growth is still healthy. But I'm not so sure things are as tranquil as they appear.What's important is whether labor market conditions are getting better or worse. Momentum matters, and the data tells a pretty obvious tale: Conditions are deteriorating. The cracks keep widening in the jobs market, pushing up unemployment, albeit slowly, and weighing on the growth of employee compensation. This was true before President Donald Trump came back onto the scene, though the negative pressures are being exacerbated by the jump in policy uncertainty as he reorients US trading relationships.Frankly, I think the Fed is willfully ignorant of the shifting balance of risks. Powell has repeatedly said: "Policy is well positioned. The costs of waiting to see further are fairly low." I disagree. It's a problem that Powell continues to characterize the economy as solid even as it has been slowing. It's abundantly clear that the Fed is not yet ready to step in and support deteriorating economic conditions, reinforcing a negative feedback loop.Policy is about trade-offs, and those trade-offs are about weighing benefits and costs. In my view, the household budget constraint is already worsening. That'll make it tough for consumers to absorb higher prices. If the Fed is conditioning itself to be behind the curve, the risks are pretty clear: Unemployment will rise.Underneath the placid surface of the job market lie a few important currents that show just how worrisome the situation has become. The first is the continued decline of job openings. The latest data from the job site Indeed shows new postings sliding to fresh lows, a sign that hiring demand continues to cool.The newest shift is particularly important because of a concept called the Beveridge curve, which plots the relationship between job vacancies and the jobless rate. The curve shows that in the immediate post-lockdown period, businesses were looking for a lot of new candidates, perhaps not expecting to fill all their openings. Therefore, job openings could decline without causing a meaningful uptick in the unemployment rate. This was true during the super-hot post-lockdown jobs market. Now, however, we're operating along a more treacherous part of this curve. Companies are listing only the roles they really need to fill, so further declines in job vacancies imply larger increases in unemployment. Things could get ugly fast.Another worrying trend is the types of jobs that are being added to the economy. Areas of the labor market that are more closely correlated with the underlying health of the economy continue to slow, with much of the employment growth over the past year held up by idiosyncratic areas such as private education and health services. In particular:Residential-construction employment has declined over the past six months. The number of newly completed single-family homes on the market continues to rise. With more finished units to sell, there's not much need to break ground on new homes.The decline in crude oil prices is going to weigh on oil- and gas-related employment. After all, a survey conducted in March by the Federal Reserve Bank of Dallas found firms needed average oil prices of about $65 a barrel to drill profitably. If energy firms are less profitable, I'd expect employment in the industry to drop.Manufacturing employment is moving sideways, at best. Survey-based measures of factory employment continue to slide, indicating additional job cuts on the horizon. Moreover, the president's tariffs directly affect many of the intermediate goods that factories use in their production processes.Another current of concern is the composition of America's unemployed. While the headline unemployment rate has crept up to only 4.2% from its low of 3.4% in April 2023, we're seeing a rising pool of mid- and long-term unemployment. The number of people who were unemployed between five and 14 weeks jumped to 2.27 million in April of this year, up from a low of 1.53 million in 2022. Those considered long-term unemployed, which is anything over six months, are up to 1.67 million from 1.05 million in early 2023. With growth slowing, the risk is that the duration of unemployment continues to rise. The longer someone is out of work, the more challenging it becomes to get them back into employment.In a similar vein, the number of permanent job losers, defined as unemployed people who were fired or laid off and began looking for work again, keeps climbing. This category now represents over one-fourth of the unemployed population, a historically high percentage. The composition of unemployment is getting worse, not better. The risk is that tariffs lead to a temporary increase in layoffs (because firms expect the tariffs to be rolled back) that end up being permanent.The pay data for workers who have jobs also shows worrying signs. Excluding occupations paid on incentives or commissions, wages and salaries for civilians were up only 3% annually through the first quarter of the year. While that's still a healthy number, forward-looking indicators such as posted wage growth and small-business compensation plans imply more cooling ahead.Of course, a rather big boulder has been thrown into the labor market stream: tariffs. Trump's trade upheaval has made a bad situation worse. Now, I know what you are thinking. What if there is a quick turnaround in trade negotiations? What if we get trade deals? What if stocks rally as a result?I don't think it matters much — the die is cast to some degree.Uncertainty is a feature of trade negotiations. I suppose it's better that the parties involved are talking rather than not talking, but it's hard for any firm to want to get in front of these negotiations and invest and hire now. What if tariff rates go back to zero, and you just decided to make a large commitment to reorient your supply chain logistics? What about fears that any deal can now be undone by a future administration? Trade negotiations take time, and it's unrealistic to anticipate a quick deal that has teeth. Even the preliminary agreements with the UK and China, while they have cooled the temperature somewhat, represent serious escalations in barriers compared with last year. The issue is how much damage has been done by tariffs, how much damage is being done by uncertainty, and how much damage continues to be done by the Fed not stepping out to assuage any fears.For starters, I think it's best to focus on what has actually happened. There's a baseline tariff of 10%, another 25% on steel and aluminum, and tariffs on non-USMCA cars and car parts. Yes, the US and China have backed off the eye-watering tariffs that were threatened throughout April, but a 30% rate is still exceptionally high, and the temporary nature of the reprieve adds another element of uncertainty. All told, the effective tariff rate on products coming into the US is still roughly 15%, the highest in almost a century. This amounts to a meaningful shock to the economy: It remains to be seen how much consumer prices rise, but tariffs, at a minimum, increase costs.Even if a continued trickle of deals fuels the stock market rally, stock prices are not the main consideration for labor market outcomes. US stocks have enjoyed a remarkable run over the past 14 months, rising roughly 16% at an annual rate. But this hasn't kept the unemployment rate from rising 0.8 percentage points over this period. Put differently, buoyant financial market conditions have not been enough to keep the labor market from slowing in the first place.The real source of relief, I think, is a shift in the Fed's interest rate maneuvers. On May 7, Powell and the rest of the Federal Open Market Committee left rates unchanged at 4.25% to 4.5%. Even though it's the Fed's job to make decisions with imperfect information, it remains in wait-and-see mode. As it stands, the growth of wages and salaries is running below the level of the Fed's headline interest rate. Historically, this is a sign that policy is too restrictive.If the administration can keep up the pretense of negotiations on the expectation that global trade barriers eventually will come down, it might see the markets come to its defense — stocks rally, bond yields fall. If that's the case, it could shift the blame for the jobs market slowdown onto the Fed.For its part, the Fed believes that the US economy is expanding at a solid pace and that labor market conditions are solid, even though labor demand continues to cool. If labor market conditions have already cooled, what makes the Fed assume this stabilizes on its own? It can't and won't, which means a policy response will ultimately be required.For investors, it's worth highlighting that the labor market slowdown is already in motion to a meaningful degree. So it still makes sense to be defensive and anticipate rate cuts this year, as early as the summer. That should be good for fixed income.Neil Dutta is head of economics at Renaissance Macro Research.Read the original article on Business Insider

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