Weekly Update - United States: A soft landing of the job market in sight

United States: A soft landing of the job market in sight

One of the characteristics of the post-Covid recovery in the United States is the tight labour market, with strong growth in job creation and significant wage increases. This strong momentum has contributed to the rise in inflationary pressures, leading the Federal Reserve (Fed) to sharply increase its key rates. Since the beginning of the year, the dynamics of the labour market have slowed, which should allow growth to moderate, but also to bring inflation down towards its 2% target. This scenario should allow the Fed to start its rate cut cycle in September.

A labour market that is rebalancing. One of the main characteristics of the post-Covid economic recovery is the very good performance of the labour market. Indeed, while the unemployment rate very quickly returned to its pre-crisis level, job creations showed significant increases and the number job openings was at high levels. The combination of these elements has resulted in a tight labour market (Chart 1), with a supply of jobs exceeding the demand of jobs, and thus in strong wage pressures and upward pressure on inflation. It is mainly this "imbalance" that has led the Fed to raise its key rate from 0.25% in 2022 to 5.5% in 2023. However, since the beginning of the year, the labour market has shown a reduction in these imbalances. On the one hand, the unemployment rate, which was at a historically low of 3.4% in 2023, increased to 3.9% in May, close to its equilibrium level according to the Fed. On the other hand, the number of positions to be filled has also decreased significantly compared to its peak in 2022 and has almost returned to its pre-Covid crisis level. Finally, wage growth has also moderated and is gradually converging towards its 2019 level (Chart 2).

Economic activity is moderating. The reduction in labour market tensions has resulted in a slowdown in the economy from a very high level. While GDP growth was at a pace of 3.5% at the end of 2023, it seems to be stabilising below 2% in H1 24, close to the pre-Covid growth rate. This slowdown reflects the moderation in the consumption of goods and in government spending. However, household consumption of services and non-residential private investment remain resilient, reflecting the sound economic agents’ balance sheets and investment projects related to artificial intelligence and the IRA.

A rate cut cycle that would start in September. While the Fed is expected to maintain the Fed funds rate range at 5.25%-5.50% at the July 31 meeting, we continue to believe that it will start its rate cut cycle at the September 18 meeting. The reduction of labour market imbalances, and thus the continued moderation of inflation toward the 2% target, should give the Fed room to begin to reduce the restrictive nature of its policy as part of its dual objectives of controlling inflation and full employment. This scenario, of moderation in activity and inflation as well as the prospect of rate cuts, remains consistent with our strategic position, namely overweight US equity markets and constructive on bond markets.

Other highlights of the week

In the highlights of the week, we chose to talk about credit activity in the Euro area as well as inflation data in the United States:

• Bank credit in the euro area remained weak in May, illustrating once again the restrictive side of the ECB's monetary policy. Year-on-year, bank credit growth remained close to 0% in May. We expect the start of the ECB's rate cut cycle to support bank lending in the coming quarters. In France, bank credit is still showing very moderate growth, with an increase of 0.7% in May. Household credit is still constrained by high interest rates and tighter lending conditions.

• The PCE index, the Fed's preferred inflation indicator, shows that the disinflation momentum continues. Indeed, headline and core inflation rose to 2.6% in May, approaching the Fed's comfort level. Moderation in house prices and continued deflation in property prices continue to help inflation converge towards the 2% target.  The monthly household report also confirms the good performance of household consumption as well as their real disposable income, with an increase of 2.4% and 1.2% respectively over one year in May.

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