In September, the Federal Reserve cut the federal funds rate by 50 basis points (.50), lowering the rate to 4.75 to 5.0, easing restrictive monetary policy that was adopted to reduce elevated inflation. The economy is growing at a stable, modest rate driven by moderate consumer demand. The 12-month core personal consumption expenditures index (PCE), the inflation metric the Fed uses to set monetary policy, moved down to 2.6 percent in July, closer to, but still above, the 2.0 percent inflation target. The totality of economic data suggests that inflation is declining on a sustainable basis, with a lag between the rate cut and the prices households see every day.
The data shows the economy moving toward a soft landing, a condition in which restrictive monetary policy reduces inflation without generating a recession. Economic growth (GDP) is expected to remain near 3.0 percent for the remainder of 2024 and into 2025. Real wage increases, about 4.0 percent, will support stable household purchasing power. The labor market has moved into better balance between labor supply and demand. The number of job openings is twice the number of workers seeking employment; in the last quarter hiring, quits, and layoffs have been flat.
In projecting future labor market developments, it is useful to consider the impact of artificial intelligence (AI). In the last decade technology companies made major investments in developing AI. The impact of AI is uncertain but is likely to have a large and sustained boost on labor productivity, the amount of output an individual worker produces over time. Growth in output per person is the basis for determining workers’ real earnings, the source of household purchasing power.
Because of their impact on productivity, past technological innovations produced both positive and negative shocks on the demand for specific occupations. AI will have the same impact, eliminating some jobs and creating new ones. It’s necessary to track the pace and direction of AI, identifying occupations that are likely to have large exposure to AI. It’s also important to increase funding for basic education and skills training to assure that all population groups benefit from the positive effects AI will have on workforce income distribution. The long-term economic outlook will be influenced by the pace and scope of the development of artificial intelligence.
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Employment increased 254 thousand in September and the unemployment rate changed little at 4.1 percent. The labor force participation rate was unchanged at 62.7 percent. Employment continued to trend up in food services and drinking places, health care, government, social assistance, and construction. There was little change in employment in other major industries. Average hourly earnings grew 0.4 month/month and 4.1 percent year/year. The average workweek remained unchanged at 34.2 hours. Demographically, the White unemployment rate was 3.7 percent; the Black rate was 5.7 percent, producing a 1.54 gap in the racial unemployment disparity, much below the previously persistent 2:1 percentage point unemployment gap.
This is a good report, reflecting an economy growing at a stable, balanced rate. Federal Reserve restrictive monetary policy has lowered inflation to 2.6 percent, very near the 2.0 percent long term target. This report, the last before the Presidential election, is likely to encourage the Federal Open Market Committee (FOMC) to reduce the federal funds rate by 25 basis points in their November meeting, which will come after the election. FOMC reduced the rate by 50 basis points in the September meeting.
Bernard E. Anderson, Ph. D., Whitney M. Young, Jr. Professor Emeritus, The Wharton School, University of Pennsylvania and Senior Economic Advisor, National Urban League